Risk and performance estimation in hedge funds revisited: Evidence from errors in variables |
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| Authors: | Alain Coën Georges Hübner |
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| Institution: | 1. University of Quebec in Montreal (UQÀM), Montréal Canada H3C 4R2;2. HEC — Management School of the Université de Liège, Belgium;3. Limburg Institute of Financial Economics, Maastricht University, Maastricht, The Netherlands;4. Luxembourg School of Finance, University of Luxembourg, Luxembourg |
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| Abstract: | This paper revisits the performance of hedge funds in the presence of errors in variables. To reduce the bias induced by measurement error, we introduce an estimator based on cross sample moments of orders three and four. This Higher Moment Estimation (HME) technique has significant consequences on the measure of factor loadings and the estimation of abnormal performance. Large changes in alphas can be attributed to measurement errors at the level of explanatory variables, while we emphasize some shifts in the economic contents of the equity risk premiums by switching from OLS to HME. |
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