Joint Survival Analysis of Hedge Funds and Funds of Funds Using Copulas

21 Pages Posted: 14 Jul 2011 Last revised: 16 Aug 2011

See all articles by Greg N. Gregoriou

Greg N. Gregoriou

SUNY College at Plattsburgh; McGill University

Razvan C. Pascalau

SUNY College at Plattsburgh - School of Business and Economics; University of Navarra

Date Written: August 31, 2009

Abstract

This paper uses copulas to model the joint survival within the groups of hedge funds and funds of funds managed by the same manager. Given their skewed distribution, a simple survival analysis based on linearity assumptions may fail to fully capture the dependence caused by extreme events in the tails. The study employs both one and two-parameter families of copulas to capture more than one type of dependence, like upper and lower tail dependence and concordance measures. 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 results show that the survivor functions of hedge funds and funds of funds while different from each other are strongly dependent, with the degree of dependence increasing in the tails. The evidence in the paper aligns with previous findings on financial markets contagion and it shows that contagion risk is especially important between hedge funds and funds of funds. In particular, the results suggest that a simple linear approach may provide misleading results regarding the full degree of association between hedge funds and funds of funds.

Keywords: Hedge Funds, Funds of Funds, Copula functions, Survival analysis

JEL Classification: C130, G290

Suggested Citation

Gregoriou, Greg N. and Pascalau, Razvan C., Joint Survival Analysis of Hedge Funds and Funds of Funds Using Copulas (August 31, 2009). Available at SSRN: https://ssrn.com/abstract=1465104 or http://dx.doi.org/10.2139/ssrn.1465104

Greg N. Gregoriou

SUNY College at Plattsburgh ( email )

Plattsburgh, NY 12903
United States

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Razvan C. Pascalau (Contact Author)

SUNY College at Plattsburgh - School of Business and Economics ( email )

101 Broad Street
Plattsburgh, NY 12901
United States
518-564-4193 (Phone)

University of Navarra ( email )

Camino del Cerro del Aguila, 3
Pamplona, Navarra 31080
Spain

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
194
Abstract Views
1,032
rank
194,098
PlumX Metrics