The first chapter, Valuing Illiquid Asset Portfolios, proposes a method of moments repeat sale regression (MM-RSR) for valuing illiquid asset portfolios. Illiquid assets, such as venture capital and real estate, are widely spread within the economy. Illiquid asset portfolios are difficult to value because assets are infrequently traded. The MM-RSR overcomes the infrequent trading problem. The method provides estimators that equal averages of individual asset returns. The estimators, therefore, strictly correspond to actual portfolio returns and essentially reduce to them when assets are frequently traded. Moreover, the method is able to value custom weighted portfolios so it helps evaluate different investing strategies. Simulations show that the method seems more accurate than several alternatives.

The second chapter, Econometrics of Venture Capital, constructs a value-weighted venture capital index from 1987 to 1999 based on 12,946 rounds of venture financing with 5,643 firms. We use the MM-RSR and a re-weighting procedure to overcome several econometric problems of valuing venture capital. The problems include unobserved project values between investment and exit and unknown values for firms that have gone out of business or remain private. We find large returns of venture capital. From 1987 to 1998, the geometric average return of the index is 35.21% per year, compared to 15.42% for NASDAQ and 13.32% for the S&P 500. Venture capital is much more volatile than both the S&P 500 and NASDAQ. Moreover, both the returns and the volatility of the venture capital index are significantly correlated with those of NASDAQ.

The third chapter investigates the Return to Scale in Venture Capital (in progress). We test two hypotheses. One is that large capital inflow predicts good future returns because money is smart. The other is that large capital flow predicts bad future returns because good investment opportunities are limited. The problem of return to scale is important because it is related to whether the large historical returns of venture capital and the associated asset allocation strategy are sustainable.