Modeling the volatilities of globally listed private equity markets

Abstract

Purpose: This paper aims to analyze the characteristics of stochastic volatility processes in globally listed private equity (LPE) markets, which are represented by nine global, regional and style indices, and reveals transmissions in the conditional variances between the different markets, based on weekly data covering the period January 2011 to December 2020. Design/methodology/approach: The study uses the generalized autoregressive conditional heteroscedasticity [GARCH(p, q)] model and its exponential GARCH (EGARCH) and GARCH-in-mean extensions. Findings: The estimates of the volatility models GARCH, EGARCH and GARCH-in-mean GARCH-M for testing the stylized properties persistence, asymmetry, mean reversion and risk premium lead to very different results, depending on the respective LPE index. Practical implications: The knowledge of conditional volatilities of LPE returns as well as the detection of volatility transmissions between the different LPE markets under investigation serve to support asset allocation decisions with respect to risk management or portfolio allocation. Hence, the findings are important for all kinds of investors and asset managers who consider investments in LPE. Originality/value: The authors present a novel study that examines the conditional variance for globally LPE markets by using LPX indices, offering valuable insight into this growing asset class.