Question 3 Berglund, Guidolin, and Pedio (2020) investigate the effect of monetary policy announcements on the...
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Question 3 Berglund, Guidolin, and Pedio (2020) investigate the effect of monetary policy announcements on the performance of hedge funds. The strategies generally pursued by hedge funds typically benefit from high volatility and therefore the authors suspect that accommodative unconventional monetary policy may have impaired the performance of hedge funds. As a general rule, hedge fund managers are evaluated on the basis of their ability to generate returns in excess of those that are justified by the exposure to systematic factors. This average excess return is commonly referred to as "alpha." To measure the performance of the hedge funds, the authors estimate the following regression RR₁ = aa+BBRRRR.) + BBSMMSSMMBB + BBMHHMMH+BBMMMMMMMM + BB10A10yy +BBBB1144Spreadt + Et where RR is the return of the hedge fund index, RR-RR is the excess return of the market, SSMMBB is the size factor, HHMMHHit is the value factor, MMMMMM is the momentum factor, 410yyii is the change in the Treasury 10 year yield and 44Spread, is the change in the spread between Moody's Baa index yield minus the 10-year Treasury yield and the intercept is the alpha of the fund. The sample spans from November 2004 to December 2016 and consist of monthly data. As a first step the authors use a Chow test to identify whether November 2008 (i.e., the date in which the launch of the first quantitative easing policy was announced) represents a break in the regression above and they obtain a F-statistic of 1.7554 with an associated p-value of 0.023. REQUIRED Page 7 of 10 Then, the authors estimate two regressions, one over the subsample November 2004 - November 2008 and one over the subsample December 2008 December 2016. The restating estimates are reported below. Dependent variable: αa RRmmMMii-RRff SMB HML MOM A10yy ASSSSBBIIBBII 2 Nov 2004 - Nov 2008 Dec 2008 Dec 2016 0.0094** 0.1496 TURN OVER -0.3925 0.4837* 0.2508 0.2744** -7.2104** -0.0009 0.3024** -0.0499 -0.2150** -0.0006 0.2382* -2.173 R-squared 0.806 0.798 *** p < 0.01, ** p < 0.05, * p < 0.10, two-sided tests. a. Briefly discuss what is the aim of a Chow test and what are the null and the alternative hypotheses. Do the reported results from the Chow test support the idea of presence of breaks in the relationship between the hedge fund returns and their explanatory factors? (7 marks) b. Do you think that the evidence in the table confirms the claim of the authors that the performance of hedge funds has been damaged by the expansionary monetary policy that has been pursued after November 2008? Explain your answer. (5 marks) c. Suppose that, instead of estimating two separate regressions on the two sub-samples where all the coefficients are allowed to change, they had been interested in estimating the difference in the alpha pre and post the start of the expansionary monetary policy, while leaving all the other coefficients unchanged. What model specification should they have used? (8 marks) Question 3 Berglund, Guidolin, and Pedio (2020) investigate the effect of monetary policy announcements on the performance of hedge funds. The strategies generally pursued by hedge funds typically benefit from high volatility and therefore the authors suspect that accommodative unconventional monetary policy may have impaired the performance of hedge funds. As a general rule, hedge fund managers are evaluated on the basis of their ability to generate returns in excess of those that are justified by the exposure to systematic factors. This average excess return is commonly referred to as "alpha." To measure the performance of the hedge funds, the authors estimate the following regression RR₁ = aa+BBRRRR.) + BBSMMSSMMBB + BBMHHMMH+BBMMMMMMMM + BB10A10yy +BBBB1144Spreadt + Et where RR is the return of the hedge fund index, RR-RR is the excess return of the market, SSMMBB is the size factor, HHMMHHit is the value factor, MMMMMM is the momentum factor, 410yyii is the change in the Treasury 10 year yield and 44Spread, is the change in the spread between Moody's Baa index yield minus the 10-year Treasury yield and the intercept is the alpha of the fund. The sample spans from November 2004 to December 2016 and consist of monthly data. As a first step the authors use a Chow test to identify whether November 2008 (i.e., the date in which the launch of the first quantitative easing policy was announced) represents a break in the regression above and they obtain a F-statistic of 1.7554 with an associated p-value of 0.023. REQUIRED Page 7 of 10 Then, the authors estimate two regressions, one over the subsample November 2004 - November 2008 and one over the subsample December 2008 December 2016. The restating estimates are reported below. Dependent variable: αa RRmmMMii-RRff SMB HML MOM A10yy ASSSSBBIIBBII 2 Nov 2004 - Nov 2008 Dec 2008 Dec 2016 0.0094** 0.1496 TURN OVER -0.3925 0.4837* 0.2508 0.2744** -7.2104** -0.0009 0.3024** -0.0499 -0.2150** -0.0006 0.2382* -2.173 R-squared 0.806 0.798 *** p < 0.01, ** p < 0.05, * p < 0.10, two-sided tests. a. Briefly discuss what is the aim of a Chow test and what are the null and the alternative hypotheses. Do the reported results from the Chow test support the idea of presence of breaks in the relationship between the hedge fund returns and their explanatory factors? (7 marks) b. Do you think that the evidence in the table confirms the claim of the authors that the performance of hedge funds has been damaged by the expansionary monetary policy that has been pursued after November 2008? Explain your answer. (5 marks) c. Suppose that, instead of estimating two separate regressions on the two sub-samples where all the coefficients are allowed to change, they had been interested in estimating the difference in the alpha pre and post the start of the expansionary monetary policy, while leaving all the other coefficients unchanged. What model specification should they have used? (8 marks)
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