Journal of Risk

Risk.net

Modeling extreme returns and asymmetric dependence structures of hedge fund strategies using extreme value theory and copula theory

Jan Viebig, Thorsten Poddig

ABSTRACT

We use extreme value theory and copula theory to model multivariate daily return distributions of hedge fund strategy indexes. Multivariate outliers in time series of hedge fund strategies are clustered when volatilities and credit spreads increase and investors take a "flight to quality" and seek liquidity. In light of the strong "domino effect" in daily return series of hedge fund strategy indexes during the financial crisis 2008-9, the generalized Pareto distribution copula approach is an appropriate modeling choice for approximating multivariate hedge fund distributions exhibiting extreme return observations and asymmetric dependence structures. Generalized Pareto distributions are efficient approximations for the fat-tailed distributions of returns on hedge funds exceeding high thresholds. Tests for correlation symmetry show that dependence structures between several hedge fund strategies are often asymmetric. Copulas can be used to model symmetric and asymmetric dependence structures between different hedge fund strategies.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: