File
probability_liquidation.m
Name
probability_liquidation
Synopsis
probability_liquidation - calculates the probability of fund liquidation. Takes as input coefficients generated from probability_liquidation_model.
Introduction
NOTE: PART OF A SET OF 2 RELATED FILES:
Chan, Getmansky, Haas, and Lo (2006a, 2006b) consider the broader impact of hedge funds on systemic risk by examining the unique risk/return profiles of hedge funds at both the individual-fund and aggregate-industry levels and propose three new risk measures for hedge fund investments. In the third risk measure, the authors create a measure of the probability of hedge fund liquidation by running a logit model on a set of factors driving hedge fund performance.
The authors describe three metrics in their paper; we concetrate on Hedge Fund Liquidation Probability. This metric is discussed extensively in Section F.7.1.2, and specifically in equations (A.106) and (A.107), in Bisias et al. (2012). Please refer to those pages for an extensive description of the code in this module and the required inputs.
License
=============================================================================
Copyright 2011, Dimitrios Bisias, Andrew W. Lo, and Stavros Valavanis
COPYRIGHT STATUS: This work was funded in whole or in part by the Office of
Financial Research under U.S. Government contract TOSOFR-11-C-0001, and is,
therefore, subject to the following license: The Government is granted for
itself and others acting on its behalf a paid-up, nonexclusive, irrevocable,
worldwide license to reproduce, prepare derivative works,
distribute copies to the public, perform and display the work.
All other rights are reserved by the copyright owner.
THIS SOFTWARE IS PROVIDED "AS IS". YOU ARE USING THIS SOFTWARE AT YOUR OWN RISK. ANY EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE DISCLAIMED. IN NO EVENT SHALL THE AUTHORS, CONTRIBUTORS, OR THE UNITED STATES GOVERNMENT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY, OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES; LOSS OF USE, DATA, OR PROFITS; OR BUSINESS INTERRUPTION) HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, WHETHER IN CONTRACT, STRICT LIABILITY, OR TORT (INCLUDING NEGLIGENCE OR OTHERWISE) ARISING IN ANY WAY OUT OF THE USE OF THIS SOFTWARE, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.
=============================================================================
Inputs
Outputs
Code
% Run warning message
warning('OFRwp0001:UntestedCode', ...
['This version of the source code is very preliminary, ' ...
'and has not been thoroughly tested. Users should not rely on ' ...
'these calculations.']);
%
% Parameters:
% coefficient The 9 coeffs returned by the function
% probability_liquidation_model
% age The age of the fund
% prev_assets The assets under management of the fund last year
% returns A 3x1 vector for the returns of the last 3 years going backwards
% i.e returns(1) are the current returns
% flows A 3x1 vector for the flows of the last 3 years going backwards
% i.e flows(1) are the current flows
linear_term = coefficients'*[1 age prev_assets returns' flows']';
p = exp(linear_term)/(1+exp(linear_term));
Examples
NOTE: Numbers used in the examples are arbitrary valid values.
They do not necessarily represent a realistic or plausible scenario.
coefficients = [.11, -.07, .09, -.16, .08, .03, .05, -.08, .09]'
age = 20
prev_assets = 4.6
returns = [0.05, 0.03, 0.1]'
flows = [.9, .7, 1.3]'
p = probability_liquidation(coefficients, age, prev_assets, ...
returns, flows)
References