Risk measurement distortion: an improved model of return smoothing
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We examine the effects of smoothed hedge fund returns on standard deviation, skewness, and kurtosis of return and on correlation of returns using a MA(2)-GARCH(1,1)-skewed-t representation instead of the traditional MA(2) model employed in the literature. We present evidence that our proposed representation is more consistent with the behavior of hedge fund returns than the traditional MA(2) representation and that the traditional method tends to overstate the degree of smoothing observed in hedge fund returns. We examine methods for correcting the distortive effects of smoothing using our representation.
KeywordsReturn smoothing GARCH Skewed-t
The authors want to thank the editor and an anonymous reviewer for offering constructive remarks that have greatly helped us to improve the content and exposition of the paper.
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