Valuation and arbitrage

The use of discounted cash flow (DCF) methods in investment valuation and appraisal is argued by many academics as being rational and more rigorous than the traditional capitalisation model. However those advocates of DCF should be cautious in their claims for rationality. The various DCF models all rely upon an all-encompassing equated yield (IRR) within the calculation. This paper will argue that this is a simplification of the risk perception which the investor places on the income profile from property. In determining the long term capital value of a property an 'average' DCF method will produce the 'correct' price, however, the individual short term values of each cash-flow may differ significantly. In the UK property market today, where we are facing a period in which prices are not expected to rise generally at the same rate or with such persistence as hitherto, investors and tenants are increasingly concerned with the down side implications of rental growth and investors may indeed be interested in trading property over a shorter investment horizon than they had originally planned. The purpose of this paper is therefore to bring to the analysis a rigorous framework which can be used to analyse the constituent cash flows within the freehold valuation. We show that the arbitrage analysis lends itself to segregating the capital value of the cash flows in a way which is more appropriate for financial investors

Europe’s biocidal products directive: benefits and costs in urban pest management

The European Commission’s Biocidal Products Directive (Council Directive 98/8 EC), known as the BPD, is the largest regulatory exercise ever to affect the urban pest control industry. Although focussed in the European Union its impact is global because any company selling pest control products in the EU must follow its principles. All active substances, belonging to 23 different biocidal product types, come within the Directive’s scope of regulatory control. This will eventually involve re-registration of all existing products, as well as affecting any new product that comes to the market. Some active substances, such as the rodenticides and insecticides, are already highly regulated in Europe but others, such as embalming fluids, masonry preservatives, disinfectants and repellents/attractants will come under intensive regulatory scrutiny for the first time. One of the purposes of the Directive is to offer enhanced protection for human health and the environment. The potential benefit for suppliers of pest control products is mutual recognition of regulatory product dossiers across 25 Member States of the European Union. This process, requiring harmonisation of all regulatory decision-making processes, should reduce duplicated effort and, potentially, allow manufacturers speedier access to European markets. However, the cost to industry is enormous, both in terms of the regulatory resources required to assemble BPD dossiers and the development budgets required to conduct studies to meet its new standards. The cost to regulatory authorities is also tremendous, in terms of the need to upgrade staff capabilities to meet new challenges and the volume of the work expected by the Commission when they are appointed the Rapporteur Member State (RMS) for an active substance. Users of pest control products will pay a price too. The increased regulatory costs of maintaining products in the European market are likely to be passed on, at least in part, to users. Furthermore, where the costs of meeting new regulatory requirements cannot be recouped from product sales, many well-known products may leave the market. For example, it seems that in future few rodenticides that are not anticoagulants will be available within the EU. An understanding of the BPD is essential to those who intend to place urban pest control products on the European market and may be useful to those considering the harmonisation of regulatory processes elsewhere. This paper reviews the operation of the first stages of the BPD for rodenticides, examines the potential benefits and costs of the legislation to the urban pest control industry and looks forward to the next stages of implementation involving all insecticides used in urban pest management.

Asymmetric response of demand-supply mismatch to investor's sentiment

We look through both the demand and supply side information to understand dynamics of price determination in the real estate market and examine how accurately investors’ attitudes predict the market returns and thereby flagging off extent of any demand-supply mismatch. Our hypothesis is based on the possibility that investors’ call for action in terms of their buy/sell decision and adjustment in reservation/offer prices may indicate impending demand-supply imbalances in the market. In the process, we study several real estate sectors to inform our analysis. The timeframe of our analysis (1995-2010) allows us to observe market dynamics over several economic cycles and in various stages of those cycles. Additionally, we also seek to understand how investors’ attitude or the sentiment affects the market activity over the cycles through asymmetric responses. We test our hypothesis variously using a number of measures of market activity and attitude indicators within several model specifications. The empirical models are estimated using Vector Error Correction framework. Our analysis suggests that investors’ attitude exert strong and statistically significant feedback effects in price determination. Moreover, these effects do reveal heterogeneous responses across the real estate sectors. Interestingly, our results indicate the asymmetric responses during boom, normal and recessionary periods. These results are consistent with the theoretical underpinnings.

Real estate mutual funds: herding, momentum-trading and performance

This study jointly examines herding, momentum trading and performance in real estate mutual funds (REMFs). We do this using trading and performance data for 159 REMFs across the period 1998–2008. In support of the view that Real Estate Investment Trust (REIT) stocks are relatively more transparent, we find that stock herding by REMFs is lower in REIT stocks than other stock. Herding behavior in our data reveals a tendency for managers to sell winners, reflective of the “disposition effect.” We find low overall levels of REMF momentum trading, but further evidence of the disposition effect when momentum trading is segregated into buy–sell dimensions. We test the robustness of our analysis using style analysis, and by reference to the level of fund dividend distribution. Our results for this are consistent with our conjecture about the role of transparency in herding, but they provide no new insights in relation to the momentum-trading dimensions of our analysis. Summarizing what are complex interrelationships, we find that neither herding nor momentum trading are demonstrably superior investment strategies for REMFs.

A review of the costs and benefits of demand response for electricity in the UK

The recent policy discussion in the UK on the economic case for demand response (DR) calls for a reflection on available evidence regarding its costs and benefits. Existing studies tend to consider the size of investments and returns of certain forms of DR in isolation and do not consider economic welfare effects. From review of existing studies, policy documents, and some simple modelling of benefits of DR in providing reserve for unforeseen events, we demonstrate that the economic case for DR in UK electricity markets is positive. Consideration of economic welfare gains is provided.

Transatlantic Relations: Sharing Ideals and Costs

A study of European relations with the USA and Canada after the end of the Cold War

Bayesian estimation of the double hurdle model in the presence of fixed costs

We present a model of market participation in which the presence of non-negligible fixed costs leads to random censoring of the traditional double-hurdle model. Fixed costs arise when household resources must be devoted a priori to the decision to participate in the market. These costs, usually of time, are manifested in non-negligible minimum-efficient supplies and supply correspondence that requires modification of the traditional Tobit regression. The costs also complicate econometric estimation of household behavior. These complications are overcome by application of the Gibbs sampler. The algorithm thus derived provides robust estimates of the fixed-costs, double-hurdle model. The model and procedures are demonstrated in an application to milk market participation in the Ethiopian highlands.

The interaction of volatility, volume and skewness: empirical evidence from REITs

This paper considers how trading volume impacts upon the first three moments of REIT returns. Consistent with previous studies of the broader stock market, we find that volume is a significant factor with respect to both returns and volatility. We also find evidence supportive of the Hong & Stein’s (2003) Investor Heterogeneity Theory with respect to the finding that skewness in REIT index returns is significantly related to volume. Furthermore, we also report findings that show the influence of the variability of volume with skewness.

The performance effects of composition changes on sector specific stock indices: The case of European listed real estate

This paper examines the impact of changes in the composition of real estate stock indices, considering companies both joining and leaving the indices. Stocks that are newly included not only see a short-term increase in their share price, but trading volumes increase in a permanent fashion following the event. This highlights the importance of indices in not only a benchmarking context but also in enhancing investor awareness and aiding liquidity. By contrast, as anticipated, the share prices of firms removed from indices fall around the time of the index change. The fact that the changes in share prices, either upwards for index inclusions or downwards for deletions, are generally not reversed, would indicate that the movements are not purely due to price pressure, but rather are more consistent with the information content hypothesis. There is no evidence, however, that index changes significantly affect the volatility of price changes or their operating performances as measured by their earnings per share.

Regulating vertical relations in the presence of retailer differentiation costs

We discuss public policy towards vertical relations, comparing different types of contracts between a manufacturer and a maximum of two retailers. Together with (potential) price competition between the retailers, we study the role of a (sunk) differentiation cost paid by them in order to relax competition in the retail market and broaden the market potential of the distributed product. This non-price competition element in the downstream market is responsible for our conclusion that, unlike in standard policy guidelines and previous theoretical analysis, restrictions in intra-brand competition may deserve a permissive treatment even in the absence of inter-brand competition, if retailer differentiation is costly.

Responding to the EU Emissions Trading Scheme: an empirical analysis of corporate carbon disclosure strategy

The purpose of this paper is to explore how companies that hold carbon trading accounts under European Union Emissions Trading Scheme (EU ETS) respond to the climate change by using disclosures on carbon emissions as a means to generate legitimacy compared to others. The study is based on disclosures made in annual reports and stand-alone sustainability reports of UK listed companies from 2001- 2012. The study uses content analysis to capture both the quality and volume of the carbon disclosures. The results show that there is a significant increase in both the quality and volume of the carbon disclosures after the launch of EU ETS. Companies with carbon trading accounts provide greater detailed disclosures as compared to the others without an account. We also find that company size is positively correlated with the disclosures while the association with the industry produces an inconclusive result.