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Dealing with non-normality when estimating abnormal returns and systematic risk of private equity: A closed-form solution

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  • Buchner, Axel

Abstract

The paper develops a novel econometric approach to estimate abnormal returns and systematic risk of private equity from observable investment cash flows. The unique features of the method are that it provides closed-form estimators and that it employs a generalized CAPM, which accurately takes into account that private equity returns typically deviate from a normal distribution. The methodology is validated using numerical examples and is applied to a comprehensive sample of 12,565 portfolio company investments by private equity funds. The results highlight that ignoring coskewness of private equity returns can result in biased estimates of abnormal returns and systematic risk.

Suggested Citation

  • Buchner, Axel, 2016. "Dealing with non-normality when estimating abnormal returns and systematic risk of private equity: A closed-form solution," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 60-78.
    • Handle: RePEc:eee:intfin:v:45:y:2016:i:c:p:60-78
    DOI: 10.1016/j.intfin.2016.06.001
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    2. Cumming, Douglas & Zhang, Yelin, 2016. "Alternative investments in emerging markets: A review and new trends," Emerging Markets Review, Elsevier, vol. 29(C), pages 1-23.

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    More about this item

    Keywords

    Private equity; Buyout; Venture capital; Abnormal returns; Systematic risk; Coskewness; Generalized CAPM;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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