Dynamic Prediction of Financial Distress in Hedge Funds and Funds-of-Hedge Funds

55 Pages Posted: 22 Aug 2010

Date Written: August 20, 2010

Abstract

This study establishes survival/hazard models with time-varying covariates, as well as fixed covariates, under three specifications of the Cox Proportional Hazards (CPH) model for Hedge Fund (HFs) and Funds-of-Hedge Funds (FOHFs). With the development of the SAS Macro program for generating survival probabilities, the dynamic changes in survival probabilities are predicted over the lifetime of HFs and FOHFs after the estimation of baseline hazards using mixed CPH model. This model incorporates both fixed and time-varying covariates. The resulting dynamic survival probabilities show that the mixed model developed in this study is effective for real-time prediction of the cumulative survivals of HFs and FOHFs. The estimated models exhibit satisfactory predictive accuracy in forecasting the occurrence of failures in HFs and FOHFs.

Suggested Citation

Lee, Hee Soo, Dynamic Prediction of Financial Distress in Hedge Funds and Funds-of-Hedge Funds (August 20, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1662533 or http://dx.doi.org/10.2139/ssrn.1662533

Hee Soo Lee (Contact Author)

The University of Sydney ( email )

University of Sydney
Syney, NC
Australia

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