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Wavelet multiscale analysis for hedge funds: scaling and strategies

Conlon, Thomas, Crane, Martin orcid logoORCID: 0000-0001-7598-3126 and Ruskin, Heather J. orcid logoORCID: 0000-0001-7101-2242 (2008) Wavelet multiscale analysis for hedge funds: scaling and strategies. Physica A: Statistical Mechanics and its Applications, 387 (21). pp. 5197-5204. ISSN 0378-4371

Abstract
The wide acceptance of Hedge Funds by Institutional Investors and Pension Funds has led to an explosive growth in assets under management. These investors are drawn to Hedge Funds due to the seemingly low correlation with traditional investments and the attractive returns. The correlations and market risk (the Beta in the Capital Asset Pricing Model) of Hedge Funds are generally calculated using monthly returns data, which may produce misleading results as Hedge Funds often hold illiquid exchange-traded securities or difficult to price over-the- counter securities. In this paper, the Maximum Overlap Discrete Wavelet Transform (MODWT) is applied to measure the scaling properties of Hedge Fund correlation and market risk with respect to the S&P 500. It is found that the level of correlation and market risk varies greatly according to the strategy studied and the time scale examined. Finally, the effects of scaling properties on the risk profile of a portfolio made up of Hedge Funds is studied using correlation matrices calculated over different time horizons.
Metadata
Item Type:Article (Published)
Refereed:Yes
Uncontrolled Keywords:scaling; cross-correlation; wavelets; hedge funds; econophysics;
Subjects:Physical Sciences > Statistical physics
Computer Science > Computer simulation
Mathematics > Mathematical analysis
DCU Faculties and Centres:DCU Faculties and Schools > Faculty of Engineering and Computing > School of Computing
Publisher:Elsevier
Official URL:http://dx.doi.org/10.1016/j.physa.2008.05.046
Copyright Information:Copyright © 2008 Elsevier B.V.
Use License:This item is licensed under a Creative Commons Attribution-NonCommercial-Share Alike 3.0 License. View License
ID Code:14961
Deposited On:27 Oct 2009 15:15 by Martin Crane . Last Modified 03 Oct 2018 11:39
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