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Higher Co-Moment CAPM and Hedge Fund Returns

Author

Listed:
  • Johan Knif

    (School of Economics)

  • Dimitrios Koutmos

    (100 Institute Road)

  • Gregory Koutmos

    (Fairfield University)

Abstract

This paper uses a higher moment capital asset pricing model to characterize the returns of several types of hedge fund indices. The quantile regression approach is used to test for any possible changes in the coefficients of the model. The hypothesis that the parameters are stable across the distribution of returns is tested and rejected. The most stable coefficient is the second moment (beta) coefficient. The higher moment coefficients vary considerably. Alpha returns tend to be positive and significant at the center of the distribution. The importance of higher co-moments (i.e., co-skewness and co-kurtosis) is more prevalent at the tails of the distribution of returns suggesting that there are significant tail risks. These findings could potentially have important implications for portfolio strategies and performance evaluation.

Suggested Citation

  • Johan Knif & Dimitrios Koutmos & Gregory Koutmos, 2020. "Higher Co-Moment CAPM and Hedge Fund Returns," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 48(1), pages 99-113, March.
    • Handle: RePEc:kap:atlecj:v:48:y:2020:i:1:d:10.1007_s11293-020-09659-1
    DOI: 10.1007/s11293-020-09659-1
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    References listed on IDEAS

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    Cited by:

    1. Hu, Debao & Li, Xin & Xiang, George & Zhou, Qiyao, 2023. "Asset pricing models in the presence of higher moments: Theory and evidence from the U.S. and China stock market," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    Hedge funds; Co-skewness; Co-kurtosis; CAPM; Quantile regression;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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