Conditional Dynamics and the Multi-Horizon Risk-Return Trade-Off

Chernov, Mikhail; Lochstoer, Lars A.; Lundeby, Stig R. H.

doi:10.2139/ssrn.3296130

Cited by 1 publication

(3 citation statements)

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“…3 While acknowledging that these conditions are consistent with the model misspecications (see, e.g., Chernov, Lochstoer, and Lundeby, 2018), we emphasize that models' evaluation is outside the scope of our study while some non-tradeable assets can imply SDFs that violate these standard conditions.…”

supporting

confidence: 64%

“…Moreover, these instruments condition on the past benchmark returns, in spirit of Chernov, Lochstoer, and Lundeby (2018), enabling a more robust parameter identication.…”

Section: Methodsmentioning

confidence: 99%

“…This appears a highly relevant consideration, given that Ang, Chen, Goetzmann, and Phalippou (2017) nd autocorrelation in PE return residuals with respect to standard factor models, while most SDFs implied by macro-economic models exhibit autocorrelation (e.g., both LRR and Habit models). While autocorrelation in pricing errors can be regarded as evidence of SDF misspecication, as discussed inChernov, Lochstoer, and Lundeby (2018) since Euler restriction has to hold at any horizon by the Law of Iterative Expectations, the evaluation of the performance of asset pricing models per se is outside the scope of our study.…”

mentioning

confidence: 99%

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Evaluating Private Equity Performance Using Stochastic Discount Factors

2019

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We examine the performance of 2,750 private equity (PE) funds incepted during 1979-2008 using Stochastic Discount Factors (SDFs) implied by the two leading consumptionbased asset pricing models (CBAPMs): Habit Formation and Long-run Risks. Our approach is motivated by the observation that investment mandates and cash ow patterns of university endowments and public pension funds are strongly consistent with the preferences of a representative investor per these models. Under CBAPM SDFs, venture capital funds did not destroy value in post-2000 vintages and has outperformed buyouts and generalists in the full sample, in contrast to the CAPM-based evidence. Also, we nd that 2007-08 venture vintages are on track to provide a relatively good hedge for consumption shocks during and post crisis in comparison to buyout funds. Moreover, there is virtually no spike in PE excess returns in late 90s according to CBAPMs. Our contribution is also methodical: (i) we develop a nite sample bias correction method for the NPV-based inference which is highly relevant in PE-context whereby fund cash ows span a decade and yet the panel of funds is relatively short; (ii) we propose a more ecient estimation of SDF parameters that adopts the realized risk premia matching insight per Korteweg and Nagel (2016) while supporting a more general class of SDFs. Broadly, our methodology enables a construction and calibration of portfolio-specic discount factors for PE performance evaluation that may reect nontradeable assets and liabilities which risks are not spanned by standard benchmarks.

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supporting

confidence: 64%

“…Moreover, these instruments condition on the past benchmark returns, in spirit of Chernov, Lochstoer, and Lundeby (2018), enabling a more robust parameter identication.…”

Section: Methodsmentioning

confidence: 99%

mentioning

confidence: 99%

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