Hedging private international real estate

The performance of an international real estate investment can be critically affected by currency fluctuations. While survey work suggests large international investors with multi-asset portfolios tend to hedge their overall currency exposure at portfolio level, smaller and specialist investors are more likely to hedge individual investments and face considerable specific risk. This presents particular problems in direct real estate investment due to the lengthy holding period. Prior research investigating the issue relies on ex post portfolio measure, understating the risk faced. This paper examines individual risk using a forward-looking simulation approach to model uncertain cashflow. The results suggest that a US investor can greatly reduce the downside currency risk inherent in UK real estate by using a swap structure – but at the expense of dampening upside potential.

Hedging effectiveness of total returns swaps: application to the Japanese market

The development of the real estate swap market offers many opportunities for investors to adjust the exposure of their portfolios to real estate. A number of OTC transactions have been observed in markets around the world. In this paper we examine the Japanese commercial real estate market from the point of view of an investor holding a portfolio of properties seeking to reduce the portfolio exposure to the real estate market by swapping an index of real estate for LIBOR. This paper explores the practicalities of hedging portfolios comprising small numbers of individual properties against an appropriate index. We use the returns from 74 properties owned by Japanese Real Estate Investment Trusts over the period up to September 2007. The paper also discusses and applies the appropriate stochastic processes required to model real estate returns in this application and presents alternative ways of reporting hedging effectiveness. We find that the development of the derivative does provide the capacity for hedging market risk but that the effectiveness of the hedge varies considerably over time. We explore the factors that cause this variability.

Intracellular accumulation of high levels of gamma-aminobutyrate by Listeria monocytogenes 10403S in response to low pH: uncoupling of gamma-aminobutyrate synthesis from efflux in a chemically defined medium

It is well established that the glutamate decarboxylase (GAD) system is central to the survival of Listeria monocytogenes at low pH, both in acidic foods and within the mammalian stomach. The accepted model proposes that under acidic conditions extracellular glutamate is transported into the cell in exchange for an intracellular gamma-aminobutyrate (GABA(i)). The glutamate is then decarboxylated to GABA(i), a reaction that consumes a proton, thereby helping to prevent acidification of the cytoplasm. In this study, we show that glutamate supplementation had no influence on either growth rate at pH 5.0 or survival at pH 2.5 when L. monocytogenes 10403S was grown in a chemically defined medium (DM). In response to acidification, cells grown in DM failed to efflux GABA, even when glutamate was added to the medium. In contrast, in brain heart infusion (BHI), the same strain produced significant extracellular GABA (GABA(e)) in response to acidification. In addition, high levels of GABA(i) (>80 mM) were found in the cytoplasm in response to low pH in both growth media. Medium-swap and medium-mixing experiments revealed that the GABA efflux apparatus was nonfunctional in DM, even when glutamate was present. It was also found that the GadT2D2 antiporter/decarboxylase system was transcribed poorly in DM-grown cultures while overexpression of gadD1T1 and gadD3 occurred in response to pH 3.5. Interestingly, BHI-grown cells did not respond with upregulation of any of the GAD system genes when challenged at pH 3.5. The accumulation of GABA(i) in cells grown in DM in the absence of extracellular glutamate indicates that intracellular glutamate is the source of the GABA(i). These results demonstrate that GABA production can be uncoupled from GABA efflux, a finding that alters the way we should view the operation of bacterial GAD systems.

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

Price discovery of credit spreads in tranquil and crisis periods

In this paper we investigate the price discovery process in single-name credit spreads obtained from bond, credit default swap (CDS), equity and equity option prices. We analyse short term price discovery by modelling daily changes in credit spreads in the four markets with a vector autoregressive model (VAR). We also look at price discovery in the long run with a vector error correction model (VECM). We find that in the short term the option market clearly leads the other markets in the sub-prime crisis (2007-2009). During the less severe sovereign debt crisis (2009-2012) and the pre-crisis period, options are still important but CDSs become more prominent. In the long run, deviations from the equilibrium relationship with the option market still lead to adjustments in the credit spreads observed or implied from other markets. However, options no longer dominate price discovery in any of the periods considered. Our findings have implications for traders, credit risk managers and financial regulators.