Akademiskt skrivande

You have recently landed a job as a hedge fund manager and your first task is to invest in initial public offerings of companies that operate in the same industry. The hedge fund investment policy states that the investment decision should be based on a statistical model rather than on personal opinion. As a result, you have to build a model for estimating the probability of underpricing by taking into account the following data/information: 1) overhang, 2) price update, 3) stock market sentiment, 4) underwriters’ ranking, 5) total asset turnover and 6) gearing. The empirical model has to be built on a sample of 25 IPOs that took place during the period 2000-2010 (in-sample period). After the models’ coefficients have been estimated, you are required to perform an out-of-sample testing (i.e. the empirical models’ underpricing prediction ability for upcoming IPOs) on 5 IPOs that went to the market during 2011-2013. Finally, assuming that you have to construct a US$10 million portfolio of the 5 outof- sample IPOs, you are also required to present results on the portfolio’s first trading day return when: 1) trying to maximise the probability of underpricing and assign equal weights to the allocation of available capital; and 2) trying to maximise the probability of underpricing and follow the hedge fund maximum and minimum capital allocation policy of “allocations should not exceed 35% of the available capital, and a minimum of 5% of the available capital should be allocated to all assets under consideration”. You should write a report that does not exceed 2,500 words (excl. graphs, tables, footnotes, references and appendices) and hand it in to the senior management team for approval. Note that, the report should include information, statistics and graphs that you deem necessary, but not the actual workings on building the model and further testing (the latter should be handed in on a separate excel file where all the coursework data/information employed should be presented).