Measuring idiosyncratic risks in leveraged buyout transactions
AbstractWe use a CCA model to calculate implied idiosyncratic risks of LBO transactions. A decisive model feature is the consideration of amortization. From the model, the asset value volatility and the equity value volatility can be derived via a numerical procedure. For a sample of 40 LBO transactions we determine the necessary model parameters and calculate the transactions' implied idiosyncratic risks. We discuss the expected model sensitivities and verify them by variation of the input parameters. With the knowledge of the returns to the equity investors of the LBOs we are able to calculate Sharpe Ratios on individual transaction levels for the first time, thereby fully incorporating the superimposed leverage risks.
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Bibliographic InfoPaper provided by IESE Business School in its series IESE Research Papers with number D/682.
Length: 19 pages
Date of creation: 15 Mar 2007
Date of revision:
Idiosyncratic Risk; Private Equity; Benchmarking;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-19 (All new papers)
- NEP-CFN-2007-05-19 (Corporate Finance)
- NEP-KNM-2007-05-19 (Knowledge Management & Knowledge Economy)
- NEP-RMG-2007-05-19 (Risk Management)
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