Portfolio Choice with Illiquid Assets

Ang, Andrew; Papanikolaou, Dimitris; Westerfield, Mark M.

doi:10.3386/w19436

Cited by 36 publications

(48 citation statements)

References 38 publications

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“…Previous studies have considered the (conditional) CAPM for risk-adjusting PE returns (see, e.g., Korteweg and Sorensen, 2010;Franzoni, Nowak, and Phalippou, 2012;Robinson and Sensoy, 2013;Ang, Chen, Goetzmann, and Phalippou, 2017;Korteweg and Nagel, 2016) while prior empirical evidence on Habit and LRR models has been conned to publicly traded assets (see, e.g., Constantinides and Ghosh, 2011;Breeden, Litzenberger, and Jia, 2015). Our results also contribute to the discussion on what, why, and how institutional investors (should) invest in PE (see, e.g., Lerner, Schoar, and Wongsunwai, 2007;Lucas and Zeldes, 2009;Bernstein, Lerner, and Schoar, 2013;Ang, Papanikolaou, and Westereld, 2014;Gilbert and Hrdlicka, 2015;Robinson and Sensoy, 2016).…”

supporting

confidence: 53%

Evaluating Private Equity Performance Using Stochastic Discount Factors

2019

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We examine the performance of 2,750 private equity (PE) funds incepted during 1979-2008 using Stochastic Discount Factors (SDFs) implied by the two leading consumptionbased asset pricing models (CBAPMs): Habit Formation and Long-run Risks. Our approach is motivated by the observation that investment mandates and cash ow patterns of university endowments and public pension funds are strongly consistent with the preferences of a representative investor per these models. Under CBAPM SDFs, venture capital funds did not destroy value in post-2000 vintages and has outperformed buyouts and generalists in the full sample, in contrast to the CAPM-based evidence. Also, we nd that 2007-08 venture vintages are on track to provide a relatively good hedge for consumption shocks during and post crisis in comparison to buyout funds. Moreover, there is virtually no spike in PE excess returns in late 90s according to CBAPMs. Our contribution is also methodical: (i) we develop a nite sample bias correction method for the NPV-based inference which is highly relevant in PE-context whereby fund cash ows span a decade and yet the panel of funds is relatively short; (ii) we propose a more ecient estimation of SDF parameters that adopts the realized risk premia matching insight per Korteweg and Nagel (2016) while supporting a more general class of SDFs. Broadly, our methodology enables a construction and calibration of portfolio-specic discount factors for PE performance evaluation that may reect nontradeable assets and liabilities which risks are not spanned by standard benchmarks.

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confidence: 53%

Evaluating Private Equity Performance Using Stochastic Discount Factors

2019

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“…For hedge funds, Goetzmann, Ingersoll, and Ross (2003), Panageas andWesterfield (2009), andLan, Wang, andYang (2013) analyze the impact of management fees and high-water mark based incentive fees on leverage and valuation. Ang, Papanikolaou, and Westerfield (2012) analyze a model with an illiquid asset that can be traded and rebalanced at Poisson arrival times. We are unaware, though, of any existing model that captures the illiquidity, managerial skill (alpha) and compensation of PE investments.…”

mentioning

confidence: 99%

Valuing Private Equity

Sørensen¹,

Wang²,

Yang³

2013

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“…In addition, there are other measures used to characterize the risk [8]. When the restriction that an asset cannot be traded for intervals of uncertain duration results in risk, a model of optimal allocation to liquid and illiquid assets was presented by Ang et al [9]. Shen et al [10] discussed a mean-variance portfolio selection problem under a constant elasticity of variance model and expressed explicit expressions of the optimal portfolio strategy, the value function, and the efficient frontier of the mean-variance problem.…”

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confidence: 99%

Modeling Portfolio Optimization Problem by Probability-Credibility Equilibrium Risk Criterion

Wang

Chen

Liu

2016

Mathematical Problems in Engineering

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This paper studies the portfolio selection problem in hybrid uncertain decision systems. Firstly the return rates are characterized by random fuzzy variables. The objective is to maximize the total expected return rate. For a random fuzzy variable, this paper defines a new equilibrium risk value (ERV) with credibility level beta and probability level alpha. As a result, our portfolio problem is built as a new random fuzzy expected value (EV) model subject to ERV constraint, which is referred to as EV-ERV model. Under mild assumptions, the proposed EV-ERV model is a convex programming problem. Furthermore, when the possibility distributions are triangular, trapezoidal, and normal, the EV-ERV model can be transformed into its equivalent deterministic convex programming models, which can be solved by general purpose optimization software. To demonstrate the effectiveness of the proposed equilibrium optimization method, some numerical experiments are conducted. The computational results and comparison study demonstrate that the developed equilibrium optimization method is effective to model portfolio selection optimization problem with twofold uncertain return rates.

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Portfolio Choice with Illiquid Assets

Cited by 36 publications

References 38 publications

Evaluating Private Equity Performance Using Stochastic Discount Factors

Evaluating Private Equity Performance Using Stochastic Discount Factors

Valuing Private Equity

Modeling Portfolio Optimization Problem by Probability-Credibility Equilibrium Risk Criterion

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