Sector and regional factors in real estate returns

This paper presents a simple method to measure the effect of sector and regional factors in real estate returns, and thus provides a quantitative framework for analysing the relative impact of these two diversification categories to real estate portfolio selection. Using data on Retail, Office and Industrial properties spread across 326 real estate locations in the UK, over the period 1981 to 1995, the results show that the performance of real estate is largely sector-driven. A result in line with previous work. Which implies that the sector composition of the real estate fund should be the first level of analysis in constructing and managing the real estate portfolio. As a consequence real estate fund managers need to pay more attention to the sector allocation of their portfolios than the regional spread.

Property Condition Disclosure Law: Why Did States Mandate 'Seller Tell All'?

Thirty-six US states have already enacted some form of seller's property condition disclosure law. At a time when there is a movement in this direction nationally, this paper attempts to ascertain the factors that lead states to adopt disclosure law. Motivation for the study stems from the fact that not all states have yet adopted the law, and states that have enacted the law have done so in different years. The analytical structure employs hazard models, using a unique set of economic and institutional attributes for a panel of 50 US States spanning 21 years, from 1984 to 2004. The proportional hazard analysis of law adoption reveals that greater number of disciplinary actions tends to favor passage of the law. Greater broker supervision, implying generally higher awareness among real estate agents, seems to have a negative impact on the likelihood of a state adopting a property condition disclosure law.

Property Condition Disclosure Law: Does 'Seller Tell All' Matter in Property Values?

At the time when at least two-thirds of the US states have already mandated some form of seller's property condition disclosure statement and there is a movement in this direction nationally, this paper examines the impact of seller's property condition disclosure law on the residential real estate values, the information asymmetry in housing transactions and shift of risk from buyers and brokers to the sellers, and attempts to ascertain the factors that lead to adoption of the disclosur law. The analytical structure employs parametric panel data models, semi-parametric propensity score matching models, and an event study framework using a unique set of economic and institutional attributes for a quarterly panel of 291 US Metropolitan Statistical Areas (MSAs) and 50 US States spanning 21 years from 1984 to 2004. Exploiting the MSA level variation in house prices, the study finds that the average seller may be able to fetch a higher price (about three to four percent) for the house if she furnishes a state-mandated seller's property condition disclosure statement to the buyer.

The Impact of Property Condition Disclosure Laws on Housing Prices: Evidence from an Event Study using Propensity Scores

We examine the impact of seller's Property Condition Disclosure Law on the residential real estate values. A disclosure law may address the information asymmetry in housing transactions shifting of risk from buyers and brokers to the sellers and raising housing prices as a result. We combine propensity score techniques from the treatment effects literature with a traditional event study approach. We assemble a unique set of economic and institutional attributes for a quarterly panel of 291 US Metropolitan Statistical Areas (MSAs) and 50 US States spanning 21 years from 1984 to 2004 is used to exploit the MSA level variation in house prices. The study finds that the average seller may be able to fetch a higher price (about three to four percent) for the house if she furnishes a state-mandated seller.s property condition disclosure statement to the buyer. When we compare the results from parametric and semi-parametric event analyses, we find that the semi-parametric or the propensity score analysis generals moderately larger estimated effects of the law on housing prices.

The Consequences of REIT Index Membership for Return Patterns

We study the impact of S&P index membership on REIT stock returns. Given the hybrid nature of REITs, their returns may become more like those of other indexed stocks and less like those of their underlying properties. The existing literature does not offer clear predictions on these potential outcomes. Taking advantage of the inclusion of REITs in major S&P indexes starting in 2001, we find that shared index membership significantly increases the correlation between REIT returns after controlling for the stock characteristics that determine index membership. We also document that index membership enhances the link between REIT stock returns and the performance of the underlying real estate, consistent with improved pricing efficiency. REIT investors appear to be able to enjoy the benefits of improved visibility and liquidity associated with index membership as well as the exposure to underlying real estate markets and the related benefits of diversification.

Making the train : re-conceptualising accessibility for intra-urban rail travel

Australian authorities have set ambitious policy objectives to shift Australia’s current transport profile of heavy reliance on private motor cars to sustainable modes. Improving accessibility of public transport is a central component of that objective. Past studies on accessibility to public transport focus on walking time and/or waiting time. However, travellers’ perceptions of the interface leg journeys may depend not only on these direct and tangible factors but also on social and psychological factors. This paper extends previous research that identified five salient perspectives of rail access by means of a statement sorting activity and cluster analysis with a small sample of rail passengers in three Australian cities (Zuniga et al, 2013). This study collects a new data set including 144 responses from Brisbane and Melbourne to an online survey made up of a Likert-scaled statement sorting exercise and questionnaire. It employs factor analysis to examine the statement rankings and uncovers seven underlying factors in the exploratory manner, i.e., station, safety, access, transfer, service attitude, traveler’s physical activity levels, and environmental concern. Respondents from groups stratified by rail use frequency are compared in terms of their scores of those factors. Findings from this study indicate a need to re-conceptualize accessibility to intra-urban rail travel in agreement with current policy agenda, and to target behavioral intervention to multiple dimensions of accessibility influencing passengers’ travel choices. Arguments in this paper are not limited to intra-urban rail transit, but may also be relevant to public transport in general.

Priority threat management of invasive plant species in the Lake Eyre Basin

This project is led by scientists in conservation decision appraisal and brings together a group of experts working across the Lake Eyre Basin (LEB). The LEB covers a sixth of Australia, with an array of globally significant natural values that are threatened by invasive plants, among other things. Managers at various levels are investing in attempts to control, contain and eradicate these invasive plant species, under severe time and resources limitations. To date there has been no basin-wide assessment of which weed management strategies and locations provide the best investments for maximising outcomes for biodiversity per unit cost. Further, there has been no assessment of the extent of ecosystem intactness that may be lost without effective invasive plant species management strategies. Given that there are insufficient resources to manage all invasive plant species everywhere, this information has the potential to improve current investment decisions. Here, we provide a prioritisation of invasive plant management strategies in the LEB. Prioritisation was based on cost-effectiveness for biodiversity benefits. We identify the key invasive plant species to target to protect ecosystem intactness across the bioregions of the LEB, the level of investment required and the likely reduction in invasive species dominance gained per dollar spent on each strategy. Our focus is on strategies that are technically and socially feasible and reduce the likelihood that high impact invasive plant species will dominate native ecosystems, and therefore change their form and function. The outputs of this work are designed to help guide decision-making and further planning and investment in weed management for the Basin. Experts in weed management, policy-making, community engagement, biodiversity and natural values of the Basin, attended a workshop and agreed upon 12 strategies to manage invasive plants. The strategies focused primarily on 10 weeds which were considered to have a high potential for broad, significant impacts on natural ecosystems in the next 50 years and for which feasible management strategies could be defined. Each strategy consisted of one or more supporting actions, many of which were spatially linked to IBRA (Interim Biogeographical Regionalisation of Australia) bioregions. The first strategy was an over-arching recommendation for improved mapping, information sharing, education and extension efforts in order to facilitate the more specific weed management strategies. The 10 more specific weed management strategies targeted the control and/or eradication of the following high-impact exotic plants: mesquite, parkinsonia, rubber vine, bellyache bush, cacti, mother of millions, chinee apple, athel pine and prickly acacia, as well as a separate strategy for eradicating all invasive plants from one key threatened ecological community, the GAB (Great Artesian Basin dependant) mound springs. Experts estimated the expected biodiversity benefit of each strategy as the reduction in area that an invasive plant species is likely to dominate in over a 50-year period, where dominance was defined as more than 30% coverage at a site. Costs were estimated in present day terms over 50 years largely during follow up discussions post workshop. Cost-effectiveness was then calculated for each strategy in each bioregion by dividing the average expected benefit by the average annual costs. Overall, the total cost of managing 12 invasive plant strategies over the next 50 years was estimated at $1.7 billion. It was estimated that implementation of these strategies would result in a reduction of invasive plant dominance by 17 million ha (a potential 32% reduction), roughly 14% of the LEB. If only targeting Weeds of National Significance (WONS), the total cost was estimated to be $113 million over the next 50 years. Over the next 50 years, $2.3 million was estimated to eradicate all invasive plant species from the Great Artesian Basin Mound Springs threatened ecological community. Prevention and awareness programs were another key strategy targeted across the Basin and estimated at $17.5 million in total over 50 years. The cost of controlling, eradicating and containing buffel grass were the most expensive, over $1.5 billion over 50 years; this strategy was estimated to result in a reduction in buffel grass dominance of a million ha in areas where this species is identified as an environmental problem. Buffel grass has been deliberately planted across the Basin for pasture production and is by far the most widely distributed exotic species. Its management is contentious, having economic value to many graziers while posing serious threats to biodiversity and sites of high cultural and conservation interest. The strategy for containing and locally eradicating buffel grass was a challenge to cost based on expert knowledge, possibly because of the dual nature of this species as a valued pastoral grass and environmental weed. Based on our conversations with experts, it appears that control and eradication programs for this species, in conservation areas, are growing rapidly and that information on the most cost-effective strategies for this species will continue to develop over time. The top five most cost-effective strategies for the entire LEB were for the management of: 1) parkinsonia, 2) chinee apple, 3) mesquite, 4) rubber vine and 5) bellyache bush. Chinee apple and mother of millions are not WONS and have comparatively small populations within the semi-arid bioregions of Queensland. Experts felt that there was an opportunity to eradicate these species before they had the chance to develop into high-impact species within the LEB. Prickly acacia was estimated to have one of the highest benefits, but the costs of this strategy were high, therefore it was ranked 7th overall. The buffel grass strategy was ranked the lowest (10th) in terms of cost effectiveness. The top five most cost-effective strategies within and across the bioregions were the management of: 1) parkinsonia in the Channel Country, 2) parkinsonia in the Desert Uplands, 3) mesquite in the Mitchell Grass Downs, 4) parkinsonia in the Mitchell Grass Downs, and 5) mother of millions in the Desert Uplands. Although actions for several invasive plant species like parkinsonia and prickly acacia were concentrated in the Queensland part of the LEB, the actions involved investing in containment zones to prevent the spread of these species into other states. In the NT and SA bioregions of the LEB, the management of athel pine, parkinsonia and cacti were the main strategies. While outside the scientific research goals of study, this work highlighted a number of important incidental findings that led us to make the following recommendations for future research and implementation of weed management in the Basin: • Ongoing stakeholder engagement, extension and participation is required to ensure this prioritisation effort has a positive impact in affecting on-ground decision making and planning. • Short term funding for weed management was identified as a major reason for failure of current efforts, hence future funding needs to be secure and ongoing. • Improved mapping and information sharing is essential to implement effective weed management. • Due to uncertainties in the outcomes and impacts of management options, strategies should be implemented as part of an adaptive management program. The information provided in this report can be used to guide investment for controlling high-impact invasive plant species for the benefits of biodiversity conservation. We do not present a final prioritisation of invasive plant strategies for the LEB, and we have not addressed the cultural, socio-economic or spatial components necessary for an implementation plan. Cost-effectiveness depends on the objectives used; in our case we used the intactness of ecosystems as a surrogate for expected biodiversity benefits, measured by the extent that each invasive plant species is likely to dominate in a bioregion. When other relevant factors for implementation are considered the priorities may change and some actions may not be appropriate in some locations. We present the costs, ecological benefits and cost-effectiveness of preventing, containing, reducing and eradicating the dominance of high impact invasive plants through realistic management actions over the next 50 years. In doing so, we are able to estimate the size of the weed management problem in the LEB and provide expert-based estimates of the likely outcomes and benefits of implementing weed management strategies. The priorities resulting from this work provide a prospectus for guiding further investment in management and in improving information availability.

The Impact of the EMU on International Portfolio Investments

This paper analyses the impact of the launch of the European Monetary Union (EMU) on the allocation of international portfolio investments. The initiation of the EMU provides an opportunity for comparison of competing theoretical explanations for investment behavior. Models stressing the diversification motive would predict that the increased dependence between countries participating in the EMU should reduce the attractiveness of portfolio holdings in other EMU countries. Models based on asymmetric information would instead emphasize the increased intensity in the flow of information resulting from an increase in cross border transactions between the EMU countries. The consequent decline in information asymmetry should increase, rather than reduce portfolio holdings in other EMU countries. Our results based on the allocation of Finnish foreign portfolio investment support the information-based explanation against predictions based on the diversification motive.

The expiration day effect of indexoptions and index futures on the underlying shares

This paper studies the effect of the expiration day of index options and futures on the trading volume, variance and price of the underlying shares. The data consists of all trades for the underlying shares in the FOX-index for expiration days during the period October 1995 to the mid of yer 1999. The main results seem to support the findings of Kan 2001, i.e. no manipulation on a larger scale. However, some indication of manipulation could be found if certain characteristics are favorable. These characteristics include: a) a large quantity of outstanding futures or at/in the money options contracts, b) there exists shares with high index weight but fairly low trading volume. Lastly, there is some indication that manipulation might be more popular towards the end of the examined time period.

Factors Driving Stock Option Grants - Empirical Evidence from Finland

This study contributes to the executive stock option literature by looking at factors driving the introduction of such a compensation form on a firm level. Using a discrete decision model I test the explanatory power of several agency theory based variables and find strong support for predictability of the form of executive compensation. Ownership concentration and liquidity are found to have a significant negative effect on the probability of stock option adoption. Furtermore, I find evidence of CEO ownership, institutional ownership, investment intensity, and historical market return having a significant and a positive relationship to the likelihood of adopting a executive stock option program.

The Impact of New Capital Requirements on the Portfolio Decisions of Finnish Pension Institutions

This paper examines the potential impact of new capital requirements on asset allocations of Finnish pension institutions. We describe the new requirements and consider portfolio construction to minimize regulatory capital, given the investor’s preferred level of expected return. Results identify portfolio transactions that enhance expected return without increasing capital needs. Regulation calls for portfolio diversification and prudence in management, but this paper shows that market participants can exploit inconsistencies in regulation. Possible future consequences include capital outflows from the pension system and an unintended decrease in pre-funding of old-age pensions.

Test of the Clustering Hypothesis in the Helsinki Exchanges

This paper investigates the clustering pattern in the Finnish stock market. Using trading volume and time as factors capturing the clustering pattern in the market, the Keim and Madhavan (1996) and the Engle and Russell (1998) model provide the framework for the analysis. The descriptive and the parametric analysis provide evidences that an important determinant of the famous U-shape pattern in the market is the rate of information arrivals as measured by large trading volumes and durations at the market open and close. Precisely, 1) the larger the trading volume, the greater the impact on prices both in the short and the long run, thus prices will differ across quantities. 2) Large trading volume is a non-linear function of price changes in the long run. 3) Arrival times are positively autocorrelated, indicating a clustering pattern and 4) Information arrivals as approximated by durations are negatively related to trading flow.

Intraday Seasonalities and Macroeconomic News Announcements

Using a data set consisting of three years of 5-minute intraday stock index returns for major European stock indices and U.S. macroeconomic surprises, the conditional mean and volatility behaviors in European market were investigated. The findings suggested that the opening of the U.S market significantly raised the level of volatility in Europe, and that all markets respond in an identical fashion. Furthermore, the U.S. macroeconomic surprises exerted an immediate and major impact on both European stock markets’ returns and volatilities. Thus, high frequency data appear to be critical for the identification of news that impacted the markets.

Monetary Policy, Stock Price Misalignments and Macroeconomic Instability

Perhaps the most fundamental prediction of financial theory is that the expected returns on financial assets are determined by the amount of risk contained in their payoffs. Assets with a riskier payoff pattern should provide higher expected returns than assets that are otherwise similar but provide payoffs that contain less risk. Financial theory also predicts that not all types of risks should be compensated with higher expected returns. It is well-known that the asset-specific risk can be diversified away, whereas the systematic component of risk that affects all assets remains even in large portfolios. Thus, the asset-specific risk that the investor can easily get rid of by diversification should not lead to higher expected returns, and only the shared movement of individual asset returns – the sensitivity of these assets to a set of systematic risk factors – should matter for asset pricing. It is within this framework that this thesis is situated. The first essay proposes a new systematic risk factor, hypothesized to be correlated with changes in investor risk aversion, which manages to explain a large fraction of the return variation in the cross-section of stock returns. The second and third essays investigate the pricing of asset-specific risk, uncorrelated with commonly used risk factors, in the cross-section of stock returns. The three essays mentioned above use stock market data from the U.S. The fourth essay presents a new total return stock market index for the Finnish stock market beginning from the opening of the Helsinki Stock Exchange in 1912 and ending in 1969 when other total return indices become available. Because a total return stock market index for the period prior to 1970 has not been available before, academics and stock market participants have not known the historical return that stock market investors in Finland could have achieved on their investments. The new stock market index presented in essay 4 makes it possible, for the first time, to calculate the historical average return on the Finnish stock market and to conduct further studies that require long time-series of data.

Volatility Smile Dynamics in Scenario Analysis

The objective of this paper is to suggest a method that accounts for the impact of the volatility smile dynamics when performing scenario analysis for a portfolio consisting of vanilla options. As the volatility smile is documented to change at least with the level of implied at-the-money volatility, a suitable model is here included in the calculation process of the simulated market scenarios. By constructing simple portfolios of index options and comparing the ex ante risk exposure measured using different pricing methods to realized market values, ex post, the improvements of the incorporation of the model are monitored. The analyzed examples in the study generate results that statistically support that the most accurate scenarios are those calculated using the model accounting for the dynamics of the smile. Thus, we show that the differences emanating from the volatility smile are apparent and should be accounted for and that the methodology presented herein is one suitable alternative for doing so.