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True risk of illiquid investments
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.).
2018 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesisAlternative title
Verklig risk hos illikvida investeringar (Swedish)
Abstract [en]

Alternative assets are becoming a considerable portion of global financial markets. Some of these alternative assets are highly illiquid, and as such they may require more intricate methods for calculating risk and performance statistics accurately. Research on hedge funds has established a pattern of risk being understated and various measures of performance being overstated due to illiquidity of the assets. This paper sets out to prove the existence of such bias and presents methods for removing it. Four mathematical methods aiming to adjust statistics for sparse return series were considered, and an implementation was carried out for data on private equity, real estate and infrastructure assets. The results indicate that there are in general substantial adjustments made to the risk and performance statistics of the illiquid assets when using these methods. In particular, the volatility and market exposure were adjusted upwards while manager skill and risk-adjusted performance were adjusted downwards.

Abstract [sv]

Alternativa tillgångsslag börjar utgöra en avsevärd del av globala finansiella marknader. Vissa av dessa alternativa tillgångsslag är mycket illikvida och kan som sådana kräva mer avancerade metoder för att beräkna nyckeltal för risk och utveckling mer korrekt. Forskning på hedgefonder har kunnat påvisa ett mönster där risk underskattas medan olika nyckeltal för utveckling överskattas till följd av tillgångarnas illikviditet. Målet med denna artikel är att påvisa förekomsten av sådan systematisk avvikelse samt att presentera metoder för att avlägsna densamma. Fyra matematiska metoder framtagna för att justera nyckeltal för glesa dataserier användes, och metoderna implementerades på data för tillgångar i private equity, fastigheter samt infrastruktur. Resultaten antyder att det generellt sett sker betydande justeringar av nyckeltalen för risk och utveckling för de illikvida tillgångsslagen när man tillämpar dessa metoder. Mer specifikt justerades volatiliteten och marknadsexponeringen uppåt medan förvaltarens förmåga och den riskjusterade avkastningen justerades nedåt.

Place, publisher, year, edition, pages
2018.
Series
TRITA-SCI-GRU ; 2018:344
National Category
Probability Theory and Statistics
Identifiers
URN: urn:nbn:se:kth:diva-233577OAI: oai:DiVA.org:kth-233577DiVA, id: diva2:1246581
External cooperation
COIN
Subject / course
Mathematical Statistics
Educational program
Master of Science - Applied and Computational Mathematics
Supervisors
Examiners
Available from: 2018-09-08 Created: 2018-09-08 Last updated: 2018-09-08Bibliographically approved

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CiteExportLink to record
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Citation style
  • apa
  • harvard1
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  • modern-language-association-8th-edition
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Output format
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