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

Axel Buchner

Journal of International Financial Markets, Institutions and Money, 2016, vol. 45, issue C, 60-78

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.

Keywords: Private equity; Buyout; Venture capital; Abnormal returns; Systematic risk; Coskewness; Generalized CAPM (search for similar items in EconPapers)
JEL-codes: C51 G12 G23 G24 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:45:y:2016:i:c:p:60-78

DOI: 10.1016/j.intfin.2016.06.001

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