Commercial real estate return distributions: a review of literature and empirical evidence

This paper review the literature on the distribution of commercial real estate returns. There is growing evidence that the assumption of normality in returns is not safe. Distributions are found to be peaked, fat-tailed and, tentatively, skewed. There is some evidence of compound distributions and non-linearity. Public traded real estate assets (such as property company or REIT shares) behave in a fashion more similar to other common stocks. However, as in equity markets, it would be unwise to assume normality uncritically. Empirical evidence for UK real estate markets is obtained by applying distribution fitting routines to IPD Monthly Index data for the aggregate index and selected sub-sectors. It is clear that normality is rejected in most cases. It is often argued that observed differences in real estate returns are a measurement issue resulting from appraiser behaviour. However, unsmoothing the series does not assist in modelling returns. A large proportion of returns are close to zero. This would be characteristic of a thinly-traded market where new information arrives infrequently. Analysis of quarterly data suggests that, over longer trading periods, return distributions may conform more closely to those found in other asset markets. These results have implications for the formulation and implementation of a multi-asset portfolio allocation strategy.

Cross-country effects of regulatory capital arbitrage

One reason for the recent asset price bubbles in many developed countries could be regulatory capital arbitrage. Regulatory and legal changes can help traditional banks to move their assets off their balance sheets into the lightly regulated shadows and thus enable regulatory arbitrage through the securitized sector. This paper adopts a global vector autoregression (GVAR) methodology to assess the effects of regulatory capital arbitrage on equity prices, house prices and economic activity across 11 OECD countries/ regions. A counterfactual experiment disentangles the effects of regulatory arbitrage following a change in the net capital rule for investment banks in April 2004 and the adoption of the Basel II Accord in June 2004. The results provide evidence for the existence of an international finance multiplier, with about half of the countries overshooting U.S. impulse responses. The counterfactual shows that regulatory arbitrage via the U.S. securitized sector may enhance the cross-country reallocation of capital from housing markets towards equity markets.

Islamic mutual funds' financial performance and international investment style: evidence from 20 countries

We pursue the first large-scale investigation of a strongly growing mutual fund type: Islamic funds. Based on an unexplored, survivorship bias-adjusted data set, we analyse the financial performance and investment style of 265 Islamic equity funds from 20 countries. As Islamic funds often have diverse investment regions, we develop a (conditional) three-level Carhart model to simultaneously control for exposure to different national, regional and global equity markets and investment styles. Consistent with recent evidence for conventional funds, we find Islamic funds to display superior learning in more developed Islamic financial markets. While Islamic funds from these markets are competitive to international equity benchmarks, funds from especially Western nations with less Islamic assets tend to significantly underperform. Islamic funds’ investment style is somewhat tilted towards growth stocks. Funds from predominantly Muslim economies also show a clear small cap preference. These results are consistent over time and robust to time varying market exposures and capital market restrictions.

Economic linkages across commodity futures : hedging and trading implications

We investigate cross-market trading dynamics in futures contracts written on seemingly unrelated commodities that are consumed by a common industry. On the Tokyo Commodity Exchange, we find such evidence in natural rubber (NR), palladium (PA) and gasoline (GA) futures markets. The automobile industry is responsible for more than 50% of global demand for each of these commodities. VAR estimation reveals short-run cross-market interaction between NR and GA, and from NR to PA. Cross-market influence exerted by PA is felt in longer dynamics, with PA volatility (volume) affecting NR (GA) volume (volatility). Our findings are robust to lag-specification, volatility measure, and consistent with full BEKK-GARCH estimation results. Further analysis, which benchmarks against silver futures market, TOCOM index and TOPIX transportation index, confirms that our results are driven by a common industry exposure, and not a commodity market factor. A simple trading rule that incorporates short-run GA and long-run PA dynamics to predict NR return yields positive economic profit. Our study offers new insights into how commodity and equity markets relate at an industry level, and implications for multi-commodity hedging.

Common industry exposure in seemingly unrelated commodities

We propose and document robust evidence of cross-market return, volatility, and volume interactions among futures contracts written seemingly unrelated commodities exposed to a common industry. On the Tokyo Commodity Exchange, we find such evidence in natural rubber (NR), aluminum (AL) and gasoline (GA) futures markets, which are complementary commodities heavily consumed by Japan's automobile industry. Our VAR results indicate that (i) for shorter dynamics, NR and GA volatility both influence AL volatility; GA volume affects NR volatility and volume; the GA market is immune to both NR and AL trading activities; (ii) for longer dynamics, AL volume affects both NR volume and GA volatility; NR volume influences GA volume. These results are robust to lag-specifications, volatility measures and are consistent with full BEKK-GARCH estimates. Further analysis using the silver contract, TOCOM and TOPIX transportation indices, shows that a commodity market factor cannot explain our result. Our results offer insights into how commodity and equity markets relate at an industry level.

Stock market efficiency withstands another challenge : solving the “sell in May/buy after Halloween” puzzle

Examining the years 1970 to 1998, Bouman and Jacobsen (2002) document unusually high monthly returns during the November-April periods for both United States (U.S.) and foreign stock markets and label this phenomenon the Halloween effect. Their research suggests that the Halloween effect represents an exploitable anomaly and has negative implications for claims of stock market efficiency.

Re-examining Bouman and Jacobsen’s empirical results for the U.S. reveals that their results are driven by two outliers, the “Crash” of October 1987 and the collapse of the hedge fund Long-Term Capital Management in August 1998. After inserting a dummy variable to account for the impact of the two identified outliers, the Halloween effect becomes statistically insignificant. This anomaly is not economically exploitable for U.S. equity markets. We extend the research to the S&P 500 futures contract and find no evidence of an exploitable Halloween effect over the period April 1982-April 2003.

Financial systems and mechanisms of growth in different conditions of country risk

This article uses panel data from 1976 to 2003 to investigate the ways in which banking and stock markets influence economic growth in situations of high and low country risk. The mean and Standard Deviation (SD) of country risk are adopted to classify 28 countries into Low Risk Low Volatility (LRLV) and High Risk High Volatility (HRHV) subgroups. Through the technique of error correction-based panel co-integration developed by Westerlund (2007), several results are obtained. First, LRLV countries can expand the capitalization of stock market to enhance long-term economic growth. Second, HRHV countries, on the other hand, use two distinct strategies to promote long-term economic growth. Initially they develop their equity markets, which promote economic growth directly. Strengthened equity markets, in turn, aid in the development of credit markets, which subsequently brings an economic boom. Finally, regardless of selected subgroups, the contribution of stock market capitalization to economic growth appears to be substantially larger than that of bank credit, highlighting the importance of stock markets.

The development of the institutional investor : the case of Australian life insurers 1945-85

This paper considers the post-war development of asset management practices among Australian life insurers, which have historically been among the largest institutional investors in Australia. A complex process of adaptation and organisational restructuring allowed life insurers to transform from basic investors of policy-holders’ funds to large multifaceted institutional investors in just three decades. Three stages in the development of investment practices are identified. These phases trace the process of expanding existing knowledge bases; diversification; and the acquisition of new skills; consolidation and the integration of these skills into institutional structures; thus completing one cycle of organisational learning and setting the stage for the next.

Liberalização da conta de capital e fluxos de portfólio para o Brasil

The present work seeks to investigate the dynamics of capital account liberalization and its impact on short run capital flows to Brazil in the period of 1995-2002, considering different segments such as the monetary, derivative and equity markets. This task is pursued by developing a comparative study of financial flows and examining how it is affected by the uncovered interest parity, country risk and the legislation on portfolio capital flows. The empirical framework is based on a vector autoregressive (VAR) analysis using impulse-response functions, variance decomposition and Granger causality tests. In general terms the results indicate a crucial role played by the uncovered interest parity and the country risk to explain portfolio flows, and a less restrictive (more liberalized) legislation is not significant to attract such flows.

Speculative bubbles and contagion: analysis of volatility's clusters during the DotCom bubble based on the dynamic conditional correlation model

Reviewing the de nition and measurement of speculative bubbles in context of contagion, this paper analyses the DotCom bubble in American and European equity markets using the dynamic conditional correlation (DCC) model proposed by (Engle and Sheppard 2001) as on one hand as an econometrics explanation and on the other hand the behavioral nance as an psychological explanation. Contagion is de ned in this context as the statistical break in the computed DCCs as measured by the shifts in their means and medians. Even it is astonishing, that the contagion is lower during price bubbles, the main nding indicates the presence of contagion in the di¤erent indices among those two continents and proves the presence of structural changes during nancial crisis

Capital flows to Latin America: third quarter 2001

Events in Argentina dominated most of the third quarter of 2001 until September 11, when the terrorist attacks against the United States prompted a sell-off of emerging markets assets, increasing uncertainty and risk aversion against a background of global economic slowdown. Emerging markets' short term prospects to tap international capital markets deteriorated significantly. In the third quarter of 2001, Latin American countries issued US$7.6 billion in bonds, following US$11.2 billion in the second quarter and US$13.2 billion in the first quarter, which had been a jump from only US$2.9 billion in the last quarter of 2000. At first, it seemed that the pace of debt issuance would slow down considerably given Argentina's troubles in July, as Argentina's bond auction at the beginning of the month was poorly received, forcing the government to shorten the maturity of the new debt and to pay rates as high as those during the Russian crisis in 1998. By August, however, emerging markets rebounded strongly on the back of a new US$8 billion IMF assistance package to Argentina, with both Mexico and Brazil successfully launching large issues. International markets displayed considerable flexibility as investors gave Mexico's US$1.5 billion 30- year bond and Brazil's JPY200 billion two-year samurai issue a warm reception. This return to capital markets was interrupted by the events of September 11, which caused debt issuance to fall sharply in September and October. Following the events of September 11, EMBI+ spreads widened above 1,000 basis points for the first time in nearly two years. According to J.P. Morgan there was a 3.7% market decline in September, which brought year-to-date returns for the EMBI+ to only 0.06%. Emerging markets debt, however, fared better than most other fixed income and equity markets in the immediate aftermath of the attacks. U.S. high-yield market suffered its worst month since August 1998, declining by 6.5%, while the S&P 500 and Nasdaq declined by 8.2% and 17%, respectively. Emerging equity markets suffered even greater declines, with losses as severe as 24% in local currency terms and 31% in U.S. dollar terms.

Capital flows to Latin America: first quarter 2003

Includes bibliography

Capital flows to Latin America: quarterly developments

Includes bibliography

Sensibilidad de la oferta de capital riesgo a cambios en el marco regulatorio

Este trabajo analiza la eficacia de dos cambios regulatorios sobre la captación de fondos de capital riesgo. En particular, se estudia el efecto de cambios en la tasa impositiva sobre las ganancias de capital y la introducción de una legislación específica que regula la actividad de capital riesgo. Considerando la población de entidades de capital riesgo en España en el periodo 1991-2007, los resultados muestran la eficacia de la introducción de una regulación específica que pretende limitar la doble tributación y aportar seguridad jurídica a los inversores. Por el contrario, no se encuentra suficiente evidencia del efecto de una reducción impositiva en las ganancias de capital en la tributación de las personas físicas, quizá por el efecto indirecto que tiene a través de la demanda de capital riesgo. Estos resultados son importantes para el regulador pues señalan la efectividad de determinadas normas encaminadas al desarrollo de los mercados de capital riesgo.

Essays on International Asset Allocation and Pricing

Thesis (Ph.D.)--University of Washington, 2016-06