ABSTRACTMeasures of private equity (PE) performance based on cash flows do not account for a discount‐rate risk premium that is a component of the capital asset pricing model (CAPM) alpha. We create secondary market PE indices and find that PE discount rates vary considerably. Net asset values are too smooth because they fail to reflect variation in discount rates. Although the CAPM alpha for our index is zero, the generalized public market equivalent based on cash flows is large and positive. We obtain similar results for a set of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.

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We propose a new approach to evaluating the performance of private equity investments using actual prices paid for LP shares of funds transacted in secondary markets. Our transaction-based indices exhibit substantially higher CAPM betas and lower alphas than NAV-based indices even after adjusting for staleness in NAVs. Our indices load on an additional funding liquidity factor that is uncorrelated with NAV-based index returns. In comparison, a listed PE index exhibits similar loadings on the market and funding liquidity factor as our indices, but significantly lower average returns. Our indices are useful for quarter-to-quarter benchmarking and valuing illiquid stakes in funds.

Measuring the performance of private equity investments (buyout and venture) has historically only been possible over long horizons because the IRR on a fund is only observable following the fund’s final distribution. We propose a new approach to evaluating performance using actual prices paid for limited partner shares of funds in secondary markets. We construct indices of buyout and venture capital performance using a proprietary database of secondary market prices between 2006 and 2017. These transaction-based indices exhibit significantly higher betas and volatilities, and lower alphas than NAV-based indices built from Preqin and obtained from Burgiss. There are a number of potential uses for these indices. In particular, they provide a way to track the returns of the buyout and venture capital sectors on a quarter-to-quarter basis and to value illiquid stakes in funds.

We identify new structural channels for the transmission of shocks in emerging currencies, and develop a model in which shock propagations evolving from domestic emerging stock markets, liquidity (banks’ credit default swaps), credit risk (Volatility Index) and growth (commodity prices) channels disseminate to emerging market foreign exchanges. We quantify joint downside risks and document that these asset classes tend to experience concurrent extreme shocks. We measure the time-varying shock spillover intensities to ascertain a significant increase in cross-asset linkages during periods of high volatility which is over and above any expected economic fundamentals, providing strong evidence of asymmetric investor induced contagion, triggered by cross asset rebalancing. The critical role of the credit crisis is amplified, as the beginning of an important reassessment of emerging market currencies which lead to changes in the dependence structure, a revaluation and recalibration of their risk characteristics. By modelling tail risks we detect structural breaks and find patterns consistent with the domino effect. JEL Classification: C5, F31, F37, G01, G17.

This Wespath Investment Management white paper examines two types of alternative investments—real assets and private equity—along with best practices for administering these alternative investments in public equity portfolios. We also describe how Wespath’s alternative investment strategies add value to our public equity portfolios, and how the Wespath investment team has established a solid track record in both real estate and private equity investments.

I find that economically meaningless index labels cause stock returns to covary in excess of fundamentals. S&P/Barra follow a simple mechanical procedure to define their Value and Growth indices. In so doing, they reclassify some stocks from Value to Growth even after their book-to-market ratios have risen, and vice versa. Such stocks begin to covary more with the index they join and less with the index they leave. Back-dated constituent data from Barra reveal no such label-related shifts in comovement during the ten years prior to the actual introduction of the indices in 1992.

ABSTRACTWe investigate the relationship between ex ante total skewness and holding returns on individual equity options. Recent theoretical developments predict a negative relationship between total skewness and average returns, in contrast to the traditional view that only coskewness is priced. We find, consistent with recent theory, that total skewness exhibits a strong negative relationship with average option returns. Differences in average returns for option portfolios sorted on ex ante skewness range from 10% to 50% per week, even after controlling for risk. Our findings suggest that these large premiums compensate intermediaries for bearing unhedgeable risk when accommodating investor demand for lottery‐like options.

We test the prediction of recent theories that stocks with high idiosyncratic skewness should have low expected returns. Because lagged skewness alone does not adequately forecast skewness, we estimate a cross-sectional model of expected skewness that uses additional predictive variables. Consistent with recent theories, we find that expected idiosyncratic skewness and returns are negatively correlated. Specifically, the Fama-French alpha of a low-expected-skewness quintile exceeds the alpha of a high-expected-skewness quintile by 1.00% per month. Furthermore, the coefficients on expected skewness in Fama-MacBeth cross-sectional regressions are negative and significant. In addition, we find that expected skewness helps explain the phenomenon that stocks with high idiosyncratic volatility have low expected returns.

This study simultaneously analyzes the relation between aggregate stock market returns and cash flows (net purchases of equity) from a broad array of investor groups in the United States over a long period of time from 1952 to 2004. We find strong evidence that quarterly flows are autocorrelated for each of the different investor groups. We further document a significant and positive contemporaneous relation between stock market returns and flows of Mutual Funds and Foreign Investors.

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This paper uses data on constituents of the S&P/Barra Value and Growth indices to present empirical evidence that investor sentiment generates comovement among stocks with similar book-to-market (BM) ratios. The simple methodology by which these indices are constructed help circumvent the problem that index classifications may be associated with information about fundamental value. All stocks in the S&P 500 are divided into two groups based on a single variable: the BM ratio. The cut-o value is determined such that market capitalizations of the two indices are equal. This simple methodology allows for 1) the creation of a decisive control sample, 2) a comparison of securities in each index whose BM ratios are very near the cut-o point, and 3) an examination of stocks that switched indices to equalize market capitalizations, not because of a change in fundamentals. In terms of relative magnitude, the measured variation in index returns associated with sentiment for value and growth is a little less than half of that associated with the HML factor.

We provide empirical evidence that stock market crises are spread globally through asset holdings of international investors. By separating emerging market stocks into two categories, namely, those that are eligible for purchase by foreigners (accessible) and those that are not (inaccessible), we estimate and compare the degree to which accessible and inaccessible stock index returns co-move with crisis country index returns. Our results show greater co-movement during high volatility periods, especially for accessible stock index returns, suggesting that crises spread through the asset holdings of international investors rather than through changes in fundamentals.

This paper presents convincing empirical evidence that style investing, the practice of allocating funds among styles rather than individual assets, generates comovement among stocks with similar book-to-market ratios. Data on constituents of the S&P/Barra Value and Growth indices are used to conduct empirical tests that lead to five main results. (1) When a stock switches from one index to the other, the correlation, beta, and conditional beta with the new index increase. (2) Cross-sectionally, there is evidence of a discontinuity in comovement at the book-to-market cutoff that defines the two indices. (3) The value and growth definitions of S&P/Barra are a significant determinant of what value and growth style funds hold in their portfolios. (4) None of these empirical patterns exist among the universe of stocks that would have been in the indices from 1981 to 1991. The indices did not exist before 1992. In summary, the evidence of this paper suggests comovement among stocks with similar book-to-market ratios can be generated by trading behaviors such as style investing that are not related to the systematic risk of earnings.

This paper provides empirical evidence that international investor asset holdings have an efiect on global transmission of stock market crisis. By separating stocks into two categories, those eligible for purchase by foreigners (investable) and those that are not (non-investable), we estimate and compare the degree to which investable and non-investable stock index returns co-move with the crisis country index returns. Our results indicate greater co-movement during high volatility periods, especially for investable stock index returns. The more pronounced impact on investable stocks than non-investable stocks provides evidence that crisis spreads through international investors’ asset holdings rather than through changes in countries’ market fundamentals. ⁄ Earlier versions of this paper circulated with the title \Are Investors Responsible for Stock

The small sample performance of least median of squares, reweighted least squares, least squares, least absolute deviations, and three partially adaptive estimators are compared using Monte Carlo simulations. Two data problems are addressed in the paper: (1) data generated from non‐normal error distributions and (2) contaminated data. Breakdown plots are used to investigate the sensitivity of partially adaptive estimators to data contamination relative to RLS. One partially adaptive estimator performs especially well when the errors are skewed, while another partially adaptive estimator and RLS perform particularly well when the errors are extremely leptokur‐totic. In comparison with RLS, partially adaptive estimators are only moderately effective in resisting data contamination; however, they outperform least squares and least absolute deviation estimators.