Modeling and managing portfolios including listed private equity

Modeling and managing portfolios including listed private equity

0.00 Avg rating0 Votes
Article ID: iaor20118142
Volume: 39
Issue: 4
Start Page Number: 753
End Page Number: 764
Publication Date: Apr 2012
Journal: Computers and Operations Research
Authors: , , , ,
Keywords: markov processes, simulation: applications
Abstract:

Listed private equity (LPE) provides investors with a liquid means of considering private equity in their portfolios. This paper presents a first‐order autoregressive Markov‐switching model (ARMS) which is able to capture the characteristics of the asset classes bonds, stocks, and LPE, such as heavy tails and autocorrelation. Optimizing a portfolio between bonds, stocks, and LPE shows that an investor benefits from including LPE due to the high diversification effects, which also holds for a very risk‐averse investor. Allocating a portfolio with the presented Markov‐switching optimization can help to significantly outperform a portfolio which is optimized assuming an underlying geometric Brownian motion (GBM) – even during the financial crisis: The terminal value of a portfolio of a model investor with medium risk aversion was on average 8.7% higher over the three years 2007–2009 than the GBM portfolio.

Reviews

Required fields are marked *. Your email address will not be published.