Beta in the Tails

31 Pages Posted: 12 Jun 2020

See all articles by Federico M. Bandi

Federico M. Bandi

Johns Hopkins University

Roberto Renò

University of Verona - Department of Economics

Date Written: May 17, 2020

Abstract

Do hedge funds hedge? In negative states of the world, often not as much as they should. For several styles, we report larger market betas when market returns are low (i.e., “beta in the tails”). We justify this finding through a combination of negative-mean jumps in the market returns and large market jump betas: when moving to the left tail of the market return distribution jump dynamics dominate continuous dynamics and the overall systematic risk of the fund is driven by the higher systematic risk associated with return discontinuities. Methodologically, the separation of continuous and discontinuous dynamics is conducted by exploiting the informational content of the high-order infinitesimal cross-moments of hedge-fund and market returns.

Keywords: hedge funds, diffusive risk, jump risk, beta

JEL Classification: G23, C32, C58

Suggested Citation

Bandi, Federico M. and Renò, Roberto, Beta in the Tails (May 17, 2020). Journal of Econometrics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3604263 or http://dx.doi.org/10.2139/ssrn.3604263

Federico M. Bandi (Contact Author)

Johns Hopkins University ( email )

100 International Drive
Baltimore, MD 21202
United States

Roberto Renò

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

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