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Phase-Locking and Switching Volatility in Hedge Funds

Author

Listed:
  • Monica Billio

    (Department of Economics, University Of Venice Ca� Foscari)

  • Mila Getmansky

    (msherman@som.umass.edu)

  • Loriana Pelizzon

    (pelizzon@unive.it)

Abstract

This article aims to investigate the phase-locking and switching volatility in the idiosyncratic risk factor of hedge funds using switching regime beta models. This approach allows the analysis of hedge fund tail event behavior and in particular the changes in hedge fund exposure to various risk factors potentially related to liquidity risk, conditional on different states of the market. We and that in a normal state of the market, the exposure to risk factors could be very low but as soon as the market risk factor captured by the S&P500 moves to a down-market state characterized by negative returns and high volatility, the exposure of hedge fund indexes to the S&P500 and especially to other risk factors changes signi?cantly presenting evidence of phase-locking. We further extend the regime switching model to allow for non-linearity in residuals and show that switching regime models are able to capture and forecast the evolution of the idiosyncratic risk factor in terms of changes from a low volatility regime to a distressed state that are not directly related to market risk factors.

Suggested Citation

  • Monica Billio & Mila Getmansky & Loriana Pelizzon, 2006. "Phase-Locking and Switching Volatility in Hedge Funds," Working Papers 2006_54, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2006_54
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    References listed on IDEAS

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    Cited by:

    1. Szabolcs Blazsek & Anna Downarowicz, 2013. "Forecasting hedge fund volatility: a Markov regime-switching approach," The European Journal of Finance, Taylor & Francis Journals, vol. 19(4), pages 243-275, April.
    2. Szabolcs Blazsek & Anna Downarowicz, 2008. "Regime switching models of hedge fund returns," Faculty Working Papers 12/08, School of Economics and Business Administration, University of Navarra.

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    More about this item

    Keywords

    Hedge Funds; Risk Management; Regime-Switching Models; Liquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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