Back from beyond bid-ask spread: estimating liquidity in international markets

Research on the topic of liquidity has greatly benefited from the improved availability of data. Researchers have addressed questions regarding the factors that influence bid-ask spreads and the relationship between spreads and risk, return and liquidity. Intra-day data have been used to measure the effective spread and researchers have been able to refine the concepts of liquidity to include the price impact of transactions on a trade-by-trade analysis. The growth in the creation of tax-transparent securities has greatly enhanced the visibility of securitized real estate, and has naturally led to the question of whether the increased visibility of real estate has caused market liquidity to change. Although the growth in the public market for securitized real estate has occurred in international markets, it has not been accompanied by universal publication of transaction data. Therefore this paper develops an aggregate daily data-based test for liquidity and applies the test to US data in order to check for consistency with the results of prior intra-day analysis. If the two approaches produce similar results, we can apply the same technique to markets in which less detailed data are available and offer conclusions on the liquidity of a wider set of markets.

European CMBS pricing: bond, mortgage and real estate characteristics

The recent global economic crisis is often associated with the development and pricing of mortgage-backed securities (i.e. MBSs) and underlying products (i.e. sub-prime mortgages). This work uses a rich database of MBS issues and represents the first attempt to price commercial MBSs (i.e. CMBSs) in the European market. Our results are consistent with research carried out in the US market and we find that bond-, mortgage-, real estate-related and multinational characteristics show different degrees of significance in explaining European CMBS spreads at issuance. Multiple linear regression analysis using a databank of CMBSs issued between 1997 and 2007 indicates a strong relationship with bond-related factors, followed by real estate and mortgage market conditions. We also find that multinational factors are significant, with country of issuance, collateral location and access to more liquid markets all being important in explaining the cost of secured funding for real estate companies. As floater coupon tranches tend to be riskier and exhibit higher spreads, we also estimate a model using this sub-set of data and results hold, hence reinforcing our findings. Finally, we estimate our model for both tranches A and B and find that real estate factors become relatively more important for the riskier investment products.

SATgene dietary model to implement diets of differing fat composition in prospectively genotyped groups (apoE) using commercially available foods

esponse to dietary fat manipulation is highly heterogeneous, yet generic population-based recommendations aimed at reducing the burden of CVD are given. The APOE epsilon genotype has been proposed to be an important determinant of this response. The present study reports on the dietary strategy employed in the SATgenɛ (SATurated fat and gene APOE) study, to assess the impact of altered fat content and composition on the blood lipid profile according to the APOE genotype. A flexible dietary exchange model was developed to implement three isoenergetic diets: a low-fat (LF) diet (target composition: 24 % of energy (%E) as fat, 8 %E SFA and 59 %E carbohydrate), a high-saturated fat (HSF) diet (38 %E fat, 18 %E SFA and 45 %E carbohydrate) and a HSF-DHA diet (HSF diet with 3 g DHA/d). Free-living participants (n 88; n 44 E3/E3 and n 44 E3/E4) followed the diets in a sequential design for 8 weeks, each using commercially available spreads, oils and snacks with specific fatty acid profiles. Dietary compositional targets were broadly met with significantly higher total fat (42·8 %E and 41·0 %E v. 25·1 %E, P ≤ 0·0011) and SFA (19·3 %E and 18·6 %E v. 8·33 %E, P ≤ 0·0011) intakes during the HSF and HSF-DHA diets compared with the LF diet, in addition to significantly higher DHA intake during the HSF-DHA diet (P ≤ 0·0011). Plasma phospholipid fatty acid analysis revealed a 2-fold increase in the proportion of DHA after consumption of the HSF-DHA diet for 8 weeks, which was independent of the APOE genotype. In summary, the dietary strategy was successfully implemented in a free-living population resulting in well-tolerated diets which broadly met the dietary targets set.

Risk premia in covered bond markets

The authors empirically explore risk premia in mortgage covered bond markets. Using a large panel dataset of covered bond asset swap spreads, they study the impact of different legal and economic environments. Conducting an in-depth analysis of this market, the authors find significant but small differences between countries during normal market periods. However, these differences are much stronger during times of economic crisis. Moreover, they find that developments in the real estate market are of relatively little importance during stable market periods. During economic distress, however, they are of high importance for explaining risk premia in covered bond markets

The (de)merits of minimum-variance hedging: application to the crack spread

We study the empirical performance of the classical minimum-variance hedging strategy, comparing several econometric models for estimating hedge ratios of crude oil, gasoline and heating oil crack spreads. Given the great variability and large jumps in both spot and futures prices, considerable care is required when processing the relevant data and accounting for the costs of maintaining and re-balancing the hedge position. We find that the variance reduction produced by all models is statistically and economically indistinguishable from the one-for-one “naïve” hedge. However, minimum-variance hedging models, especially those based on GARCH, generate much greater margin and transaction costs than the naïve hedge. Therefore we encourage hedgers to use a naïve hedging strategy on the crack spread bundles now offered by the exchange; this strategy is the cheapest and easiest to implement. Our conclusion contradicts the majority of the existing literature, which favours the implementation of GARCH-based hedging strategies.

Credit risk in covered bonds

Covered bonds are a promising alternative for prime mortgage securitization. In this paper, we explore risk premia in the covered bond market and particularly investigate whether and how credit risk is priced. In extant literature, yield spreads between high-quality covered bonds and government bonds are often interpreted as pure liquidity premia. In contrast, we show that although liquidity is important, it is not the exclusive risk factor. Using a hand-collected data set of cover pool information, we find that the credit quality of the cover assets is an important determinant of covered bond yield spreads. This effect is particularly strong in times of financial turmoil and has a significant influence on the issuer's refinancing cost.

House price dynamics and their reaction to macroeconomic changes

This article applies a three-regime Markov switching model to investigate the impact of the macroeconomy on the dynamics of the residential real estate market in the US. Focusing on the period between 1960 and 2011, the methodology implemented allows for a clearer understanding of the drivers of the real estate market in “boom”, “steady-state” and “crash” regimes. Our results show that the sensitivity of the real estate market to economic changes is regime-dependent. The paper then proceeds to examine whether policymakers are able to influence a regime switch away from the crash regime. We find that a decrease in interest rate spreads could be an effective catalyst to precipitate such a change of state.

Radiative forcing of the direct aerosol effect from AeroCom Phase II simulations

We report on the AeroCom Phase II direct aerosol effect (DAE) experiment where 16 detailed global aerosol models have been used to simulate the changes in the aerosol distribution over the industrial era. All 16 models have estimated the radiative forcing (RF) of the anthropogenic DAE, and have taken into account anthropogenic sulphate, black carbon (BC) and organic aerosols (OA) from fossil fuel, biofuel, and biomass burning emissions. In addition several models have simulated the DAE of anthropogenic nitrate and anthropogenic influenced secondary organic aerosols (SOA). The model simulated all-sky RF of the DAE from total anthropogenic aerosols has a range from −0.58 to −0.02Wm−2, with a mean of −0.27Wm−2 for the 16 models. Several models did not include nitrate or SOA and modifying the estimate by accounting for this with information from the other AeroCom models reduces the range and slightly strengthens the mean. Modifying the model estimates for missing aerosol components and for the time period 1750 to 2010 results in a mean RF for the DAE of −0.35Wm−2. Compared to AeroCom Phase I (Schulz et al., 2006) we find very similar spreads in both total DAE and aerosol component RF. However, the RF of the total DAE is stronger negative and RF from BC from fossil fuel and biofuel emissions are stronger positive in the present study than in the previous AeroCom study.We find a tendency for models having a strong (positive) BC RF to also have strong (negative) sulphate or OA RF. This relationship leads to smaller uncertainty in the total RF of the DAE compared to the RF of the sum of the individual aerosol components. The spread in results for the individual aerosol components is substantial, and can be divided into diversities in burden, mass extinction coefficient (MEC), and normalized RF with respect to AOD. We find that these three factors give similar contributions to the spread in results.

A multimodel assessment of the influence of regional anthropogenic emission reductions on aerosol direct radiative forcing and the role of intercontinental transport

In this study, we assess changes of aerosol optical depth (AOD) and direct radiative forcing (DRF) in response to the reduction of anthropogenic emissions in four major pollution regions in the Northern Hemisphere by using results from nine global models in the framework of the Hemispheric Transport of Air Pollution (HTAP). DRF at top of atmosphere (TOA) and surface is estimated based on AOD results from the HTAP models and AOD-normalized DRF (NDRF) from a chemical transport model. The multimodel results show that, on average, a 20% reduction of anthropogenic emissions in North America, Europe, East Asia, and South Asia lowers the global mean AOD (all-sky TOA DRF) by 9.2% (9.0%), 3.5% (3.0%), and 9.4% (10.0%) for sulfate, particulate organic matter (POM), and black carbon (BC), respectively. Global annual average TOA all-sky forcing efficiency relative to particle or gaseous precursor emissions from the four regions (expressed as multimodel mean ± one standard deviation) is  ±3.5 ±0.8,  ±4.0 ±1.7, and 29.5 ±18.1mWm ±2 per Tg for sulfate (relative to SO2), POM, and BC, respectively. The impacts of the regional emission reductions on AOD and DRF extend well beyond the source regions because of intercontinental transport (ICT). On an annual basis, ICT accounts for 11 ±5% to 31 ±9% of AOD and DRF in a receptor region at continental or subcontinental scale, with domestic emissions accounting for the remainder, depending on regions and species. For sulfate AOD, the largest ICT contribution of 31 ±9% occurs in South Asia, which is dominated by the emissions from Europe. For BC AOD, the largest ICT contribution of 28 ±18% occurs in North America, which is dominated by the emissions from East Asia. The large spreads among models highlight the need to improve aerosol processes in models, and evaluate and constrain models with observations.

The effects of corporate social performance on the cost of corporate debt and credit ratings

This study investigates the differential impact that various dimensions of corporate social performance have on the pricing of corporate debt as well as the assessment of the credit quality of specific bond issues. The empirical analysis, based on an extensive longitudinal data set, suggests that overall, good performance is rewarded and corporate social transgressions are penalized through lower and higher corporate bond yield spreads, respectively. Similar conclusions can be drawn when focusing on either the bond rating assigned to a specific debt issue or the probability of it being considered to be an asset of speculative grade.

Linkages between property asset returns and interest rates: evidence for the UK

This paper considers the effect of short- and long-term interest rates, and interest rate spreads upon real estate index returns in the UK. Using Johansen's vector autoregressive framework, it is found that the real estate index cointegrates with the term spread, but not with the short or long rates themselves. Granger causality tests indicate that movements in short term interest rates and the spread cause movements in the returns series. However, decomposition of the forecast error variances from VAR models indicate that changes in these variables can only explain a small proportion of the overall variability of the returns, and that the effect has fully worked through after two months. The results suggest that these financial variables could potentially be used as leading indicators for real estate markets, with corresponding implications for return predictability.

Development of a food-exchange model to replace saturated fat with MUFAS and n-6 PUFAS in adults at moderate cardiovascular risk

The recommendation to reduce saturated fatty acid (SFA) consumption to ≤10% of total energy (%TE) is a key public health target aimed at lowering cardiovascular disease (CVD) risk. Replacement of SFA with unsaturated fats may provide greater benefit than replacement with carbohydrates, yet the optimal type of fat is unclear. The aim was to develop a flexible food-exchange model to investigate the effects of substituting SFAs with monounsaturated fatty acids (MUFAs) or n-6 (ω-6) polyunsaturated fatty acids (PUFAs) on CVD risk factors. In this parallel study, UK adults aged 21-60 y with moderate CVD risk (50% greater than the population mean) were identified using a risk assessment tool (n = 195; 56% females). Three 16-wk isoenergetic diets of specific fatty acid (FA) composition (%TE SFA:%TE MUFA:%TE n-6 PUFA) were designed using spreads, oils, dairy products, and snacks as follows: 1) SFA-rich diet (17:11:4; n = 65); 2) MUFA-rich diet (9:19:4; n = 64); and 3) n-6 PUFA-rich diet (9:13:10; n = 66). Each diet provided 36%TE total fat. Dietary targets were broadly met for all intervention groups, reaching 17.6 ± 0.4%TE SFA, 18.5 ± 0.3%TE MUFA, and 10.4 ± 0.3%TE n-6 PUFA in the respective diets, with significant overall diet effects for the changes in SFA, MUFA, and n-6 PUFA between groups (P < 0.001). There were no differences in the changes of total fat, protein, carbohydrate, and alcohol intake or anthropometric measures between groups. Plasma phospholipid FA composition showed changes from baseline in the proportions of total SFA, MUFA, and n-6 PUFA for each diet group, with significant overall diet effects for total SFA and MUFA between groups (P < 0.001). In conclusion, successful implementation of the food-exchange model broadly achieved the dietary target intakes for the exchange of SFA with MUFA or n-6 PUFA with minimal disruption to the overall diet in a free-living population. This trial was registered at clinicaltrials.gov as NCT01478958.

Evaluating adjusted forcing and model spread for historical and future scenarios in the CMIP5 generation of climate models

We utilize energy budget diagnostics from the Coupled Model Intercomparison Project phase 5 (CMIP5) to evaluate the models' climate forcing since preindustrial times employing an established regression technique. The climate forcing evaluated this way, termed the adjusted forcing (AF), includes a rapid adjustment term associated with cloud changes and other tropospheric and land-surface changes. We estimate a 2010 total anthropogenic and natural AF from CMIP5 models of 1.9 ± 0.9 W m−2 (5–95% range). The projected AF of the Representative Concentration Pathway simulations are lower than their expected radiative forcing (RF) in 2095 but agree well with efficacy weighted forcings from integrated assessment models. The smaller AF, compared to RF, is likely due to cloud adjustment. Multimodel time series of temperature change and AF from 1850 to 2100 have large intermodel spreads throughout the period. The intermodel spread of temperature change is principally driven by forcing differences in the present day and climate feedback differences in 2095, although forcing differences are still important for model spread at 2095. We find no significant relationship between the equilibrium climate sensitivity (ECS) of a model and its 2003 AF, in contrast to that found in older models where higher ECS models generally had less forcing. Given the large present-day model spread, there is no indication of any tendency by modelling groups to adjust their aerosol forcing in order to produce observed trends. Instead, some CMIP5 models have a relatively large positive forcing and overestimate the observed temperature change.

Structure of the planetary boundary layer over southeast England: modeling and measurements

The Weather Research and Forecasting model was applied to analyze variations in the planetary boundary layer (PBL) structure over Southeast England including central and suburban London. The parameterizations and predictive skills of two nonlocal mixing PBL schemes, YSU and ACM2, and two local mixing PBL schemes, MYJ and MYNN2, were evaluated over a variety of stability conditions, with model predictions at a 3 km grid spacing. The PBL height predictions, which are critical for scaling turbulence and diffusion in meteorological and air quality models, show significant intra-scheme variance (> 20%), and the reasons are presented. ACM2 diagnoses the PBL height thermodynamically using the bulk Richardson number method, which leads to a good agreement with the lidar data for both unstable and stable conditions. The modeled vertical profiles in the PBL, such as wind speed, turbulent kinetic energy (TKE), and heat flux, exhibit large spreads across the PBL schemes. The TKE predicted by MYJ were found to be too small and show much less diurnal variation as compared with observations over London. MYNN2 produces better TKE predictions at low levels than MYJ, but its turbulent length scale increases with height in the upper part of the strongly convective PBL, where it should decrease. The local PBL schemes considerably underestimate the entrainment heat fluxes for convective cases. The nonlocal PBL schemes exhibit stronger mixing in the mean wind fields under convective conditions than the local PBL schemes and agree better with large-eddy simulation (LES) studies.