Regime switching models of hedge fund returns
WPnull/08 Regime switching models of hedge fund returns
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We estimate and compare the forecasting performance of several dynamic models of returns of different hedge fund strategies. The conditional mean of return is an ARMA process while its conditional volatility is modeled according to the GARCH specification. In order to take into account the high level of risk of these strategies, we also consider a Markov switching structure of the parameters in both equations to capture jumps. Finally, the one-step-ahead out-of-sample forecast performance of different models is compared.
Classification JEL:C13, C15, G32
Keywords:Markov switching ARMA-GARCH, forecasting performance
Number of Pages:52