BE-633: Empirical Finance
Instructions: This coursework assignment (research report) must be submitted electronically via FASER by the due date and time. When submitting your coursework assignment, you must provide one Microsoft Word or PDF file containing your written/text answers to the questions. In your answers to the questions below, you should present your EViews equation estimation output as it would be in published academic papers. (Examine several such papers, the approaches to presentation are fairly standard.) Raw EViews output should be included only in an Appendix.
The report should not exceed 2000 words in length. It should have a clear introduction and a conclusion. You should ensure that you have fully acknowledged the work of others in the body of the text and include a full list of references for all articles, books and other sources (e.g. Internet sites) that have been cited in the assignment. Coursework will be processed with plagiarism detection software. Marks will also be given for the presentation of your work.
The data required for the coursework should be downloaded from
Credit Suisse Hedge Fund Index (https://lab.credit-suisse.com),
David A. Hsieh’s Hedge Fund Data Library (https://faculty.fuqua.duke.edu/~dah7/HFData.htm),
and Fred (https://fred.stlouisfed.org/).
Question 1 (25 points)
Hedge funds strategies can be broadly divided to directional and non-directional strategies. A directional strategy tries to take advantage of the market performance. On the other hand, non-directional strategies seek to exploit misalignments in security valuations. Select two hedge funds individual strategies, one from the directional pool and one form the non-directional. Describe the strategies and compare their possible risk sources.
Question 2 (25 points)
Explain why market liquidity is important for hedge funds and how it affects their operation. How can funds mitigate any risk emanating from market liquidity.
Question 3 (50 points)
For your analysis you should download all the necessary data from the sources mentioned above. Select, download, and describe two investable hedge fund indices (make sure you download monthly data). Using as a base sample the monthly observations from 01/1994 to 12/2020, evaluate the performance of such index. Furthermore, using various subsamples of the data, evaluate and comment on the dynamic profile of the indices and the consistency of their performance.
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