A joint survival analysis of hedge funds and funds of funds using copulas
Abstract
Purpose
The purpose of this paper is to propose that simple measures of linear association are unable to capture accurately the dependence between the survival of hedge funds and funds of funds, respectively. The paper then aims to advocate the use of copulas to model the joint survival of hedge funds and funds of funds managed by the same manager.
Design/methodology/approach
The paper uses both a one‐step approach where the margins and the copula parameters are estimated jointly, and a two‐step approach where the margins are fitted first and the copula parameter is estimated thereafter given the fixed margins. The margins are estimated non‐parametrically, semi‐parametrically, and parametrically, respectively.
Findings
First, the paper finds that Kendall's tau and Spearman's rho are anywhere between three and eight times larger than the corresponding sample based measures when various families of copulas are employed. Second, additional tests show that the two survival functions are strongly dependent, with the degree of nonlinear association increasing in the lower left quadrant.
Originality/value
This is the first paper to use copulas to model the joint survival of hedge funds and funds of funds. The results highlight the asymmetric dependence between hedge funds and funds of funds, which has implications for risk management practices.
Keywords
Citation
Gregoriou, G.N. and Pascalau, R. (2012), "A joint survival analysis of hedge funds and funds of funds using copulas", Managerial Finance, Vol. 38 No. 1, pp. 82-100. https://doi.org/10.1108/03074351211188376
Publisher
:Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited