Discount-Rate Risk in Private Equity: Evidence from Secondary Market Transactions

Measures of private equity (PE) performance based on cash flows do not account for a discount-rate risk premium that is a component of the capital asset pricing model (CAPM) alpha. We create secondary market PE indices and find that PE discount rates vary considerably. Net asset values are too smooth because they fail to reflect variation in discount rates. Although the CAPM alpha for our index is zero, the generalized public market equivalent based on cash flows is large and positive. We obtain similar results for a set of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.     

The 1932 Federal Reserve Open-Market Purchases as a Precedent for Quantitative Easing

The $1 billion open-market operation conducted by the Federal Reserve, at the height of the Great Depression, was a successful precedent to the recent Quantitative Easing (QE) programs. The 1932 program entailed large purchases of medium- and long-term securities over a 4-month period. An event study analysis indicates that the program dramatically lowered medium- and long-term Treasury yields. A segmented markets model is used to analyze the effects of the open-market purchases on the economy. A significant degree of financial market segmentation is estimated, and partly explains the observed upturn in output growth. Had the Federal Reserve continued its operations and used the announcement strategy used in QE1, the Great Contraction could have been attenuated earlier. Our historical analysis suggests that the Federal Reserve in 2008 had a good predecessor to its actions.