||The Impact of the Financial Tsunami on Hedge Fund Investments: An Empirical Study
||The Impact of the Financial Tsunami on Hedge Fund Investments: An Empirical Study
||Institute of International Management (IIMBA--Master)(on the job class)
Autoregressive Conditional Heteroscedasticity (ARCH)
Generalized ARCH (GARCH)
Value at Risk (VaR)
The 2008 financial tsunami shook the global economic landscape. This study set out to determine the impact – if any – the tsunami had on the return volatility of hedge funds, and how this impacts hedge fund risk control and investment decisions, as this had yet to be determined within the academic and business fields. This was done through applying the methodology of autoregressive conditional heteroscedasticity (ARCH) and generalized ARCH (GARCH) models. In order to determine whether the specific event of the financial tsunami has had a significant prolonged impact on the volatility of the data, a dummy variable was set to distinguish the data by the event. Before the event, the dummy variable was set to be zero; after the event, the dummy variable was set to be one. Of the six Hedge Fund Research (HFR) indices’ return volatilities investigated, three (Equity Market Neutral, Relative Value Arbitrage, and Absolute Return) were found to have increased after the financial tsunami, one (Global Hedge Fund) was found to have the decreased, and two (Equity Hedge and Macro) were found to have not been significantly impacted by the tsunami. For those return volatilities that were impacted by the tsunami, the study determined that the model to be used should be the GARCH model which includes the dummy variable, in order to allow hedge fund managers and investors to more precisely make risk-control limitation allocations and conduct return-risk trade-off judgements. For the Equity Hedge and Macro indices, the original GARCH model should be used.
TABLE OF CONTENTS V
LIST OF TABLES VIII
LIST OF FIGURES IX
CHAPTER ONE INTRODUCTION 1
1.1 Research Background. 1
1.2 Research Motivation. 2
1.3 Research Question. 3
1.4 Research Scope and Constraints. 3
1.5 Research Structure. 4
CHAPTER TWO LITERATURE REVIEW 6
2.1 Hedge Funds. 6
2.1.1 An Introduction to Hedging. 6
2.1.2 Hedge Fund History. 7
2.1.3 Hedge Funds Defined. 8
2.1.4 Hedge Fund Strategies. 9
2.2 The 2008 Financial Tsunami. 12
2.2.1 Background Causes. 12
2.2.2 Impact of the Financial Tsunami. 13
2.2.3 Other Studies on the Financial Tsunami. 14
CHAPTER THREE RESEARCH METHODOLOGY 16
3.1 Models. 16
3.1.1 Autoregressive Model. 16
3.1.2 Autoregressive Conditional Heteroscedasticity. 17
3.1.3 Generalized ARCH. 18
3.1.4 GARCH Model with a Dummy Variable. 19
3.1.5 Determining the Orders. 20
3.1.6 Goodness of Fit. 21
3.2 Impact of Volatility Change on Risk Controls and Investment Decisions. 22
3.2.1 Sharpe Ratio. 22
3.2.2 Value at Risk. 23
3.3 Data Collection. 25
3.4 Steps for Analyzing the Data. 27
CHAPTER FOUR RESEARCH RESULTS 29
4.1 Data Summary. 29
4.2 Data Analysis. 30
4.2.1 Analysis of the Global Hedge Fund Index. 31
4.2.2 Analysis of the HFRX Equity Hedge Index. 37
4.2.3 Analysis of the HFRX Equity Market Neutral Index. 42
4.2.4 Analysis of the HFRX Macro Index. 48
4.2.5 Analysis of the HFRX Relative Value Arbitrage Index. 53
4.2.6 Analysis of Absolute Return Index. 59
CHAPTER FIVE CONCLUSION AND SUGGESTIONS 66
5.1 Empirical Conclusion and Contribution. 66
5.2 Suggestions for Future Studies. 69
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