Modeling and managing portfolios including listed private equity

Philipp Aigner, Georg Beyschlag, Tim Friederich, Markus Kalepky, Rudi Zagst

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

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 20072009 than the GBM portfolio.

Original languageEnglish
Pages (from-to)753-764
Number of pages12
JournalComputers and Operations Research
Volume39
Issue number4
DOIs
StatePublished - Apr 2012

Keywords

  • Asset allocation
  • Financial crisis
  • Listed private equity
  • Markov-switching models
  • Portfolio optimization
  • Private equity

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