Commercial real estate investments and the term structure of risk and return [Elektronische Ressource] / vorgelegt von Christian Rehring
129 Pages
English
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Commercial real estate investments and the term structure of risk and return [Elektronische Ressource] / vorgelegt von Christian Rehring

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Learn all about the services we offer
129 Pages
English

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Published 01 January 2010
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Language English
Document size 5 MB

Exrait





Commercial Real Estate Investments
and the Term Structure of Risk and Return





DISSERTATION

zur Erlangung des Grades eines Doktors der Wirtschaftswissenschaft

eingereicht an der
Wirtschaftswissenschaftlichen Fakultät
der Universität Regensburg


vorgelegt von
Diplom-Kaufmann Christian Rehring


Berichterstatter:
Prof. Dr. Steffen Sebastian (Universität Regensburg)
Prof. Dr. Rolf Tschernig (Universität Regensburg)


Tag der Disputation: 15. Oktober 2010
Contents


List of Figures............................................................................................................... v
List of Tables ...............................................................................................................vi
List of Abbreviations...................................................................................................vii
List of Symbols.............................................................................................................ix

1 Introduction ........................................................................................................... 1

2 Dynamics of Commercial Real Estate Asset Markets, Return Volatility, and the
Investment Horizon................................................................................................ 6
2.1 Introduction................................................................................................... 7
2.2 Background and literature review .................................................................. 9
2.3 VAR model and data ................................................................................... 12
2.3.1 VAR specification ........................................................................... 12
2.3.2 Data................................................................................................. 13
2.3.3 VAR estimates................................................................................. 17
22.4 Multi-period volatility and R statistics........................................................ 21
2.4.1 Methodology ................................................................................... 21
2.4.2 Results............................................................................................. 22
2.5 Variance decompositions............................................................................. 28
2.5.1 Methodology ................................................................................... 28
2.5.2 Results............................................................................................. 30
2.6 Market efficiency ........................................................................................ 33
2.7 Conclusion .................................................................................................. 36
2.8 Appendix: Data ........................................................................................... 37

3 Real Estate in a Mixed Asset Portfolio: The Role of the Investment Horizon ....... 38
3.1 Introduction................................................................................................. 39
3.2 Literature review ......................................................................................... 41
3.2.1 Return predictability and mixed asset allocation .............................. 41
3.2.2 Illiquidity and transaction costs........................................................ 43
3.3 VAR model and data ................................................................................... 44 Contents iii
3.3.1 VAR specification ........................................................................... 44
3.3.2 Data................................................................................................. 45
3.3.3 VAR estimates................................................................................. 48
3.4 Horizon effects in risk and return of ex post returns..................................... 51
3.4.1 The term structure of risk................................................................. 51
3.4.2 The term structure of expected returns ............................................. 55
3.5 The term structure of real estate’s ex ante return volatility........................... 58
3.6 Horizon-dependent portfolio optimizations.................................................. 62
3.6.1 Mean-variance optimization ............................................................ 62
3.6.2 Mixed asset allocation results .......................................................... 62
3.6.3 The allocation to real estate under different asset allocation
approaches....................................................................................... 65
3.7 Robustness checks....................................................................................... 68
3.7.1 Smoothing parameter....................................................................... 68
3.7.2 Quarterly dataset.............................................................................. 70
3.8 Conclusion .................................................................................................. 73
3.9 Appendix A: Data........................................................................................ 74
3.10 Appendix B: Approximation (3.10a)............................................................ 75

4 Inflation-Hedging, Asset Allocation, and the Investment Horizon ........................ 77
4.1 Introduction................................................................................................. 78
4.2 Literature review ......................................................................................... 80
4.3 VAR model and data ................................................................................... 83
4.3.1 VAR specification ........................................................................... 83
4.3.2 Data................................................................................................. 84
4.3.3 VAR estimates................................................................................. 87
4.4 Horizon effects in risk and return for nominal and real returns..................... 90
4.4.1 The term structure of risk................................................................. 90
4.4.2 Inflation hedging ............................................................................. 94
4.4.3 The term structure of expected returns ............................................. 99
4.5 Horizon-dependent portfolio optimizations for nominal and real returns.... 101
4.5.1 Mean-variance optimization .......................................................... 101
4.5.2 Results........................................................................................... 103
4.6 Robustness of the results with regard to the smoothing parameter.............. 106 Contents iv
4.7 Conclusion ................................................................................................ 108
4.8 Appendix: Data ......................................................................................... 109

References ................................................................................................................ 110

List of Figures


Figure 2.1 The term structure of return volatilities................................................... 24
2
Figure 2.2 Implied R statistics................................................................................ 27

Figure 3.1 Total real return indexes......................................................................... 48
Figure 3.2 The term structure of return volatilities................................................... 53
Figure 3.3 The term structure of return correlations................................................. 55
Figure 3.4 The term structure of expected returns.................................................... 58
Figure 3.5 The term structure of real estate’s return volatility.................................. 60
Figure 3.6 Optimal portfolio compositions .............................................................. 64
Figure 3.7 Real estate allocation under different asset allocation approaches ........... 66

Figure 4.1 Total return and cost of living indexes.................................................... 87
Figure 4.2 The term structure of return volatilities................................................... 93
Figure 4.3 The term structure of return correlations................................................. 94
Figure 4.4 The term structure of inflation volatility ................................................. 96
Figure 4.5 Inflation hedge properties....................................................................... 97
Figure 4.6 The term structure of expected returns.................................................. 101
Figure 4.7 Optimal portfolio compositions ............................................................ 104




List of Tables


Table 2.1 Sample statistics..................................................................................... 15
Table 2.2 Statistics of US direct real estate returns................................................. 16
Table 2.3 UK VAR results ..................................................................................... 18
Table 2.4 US VAR results...................................................................................... 19
Table 2.5 Variance decompositions........................................................................ 31
Table 2.A1 Data information .................................................................................... 37

Table 3.1 Sample statistics..................................................................................... 47
Table 3.2 VAR results............................................................................................ 49
Table 3.3 Results obtained from the use of alternative smoothing parameters......... 69
Table 3.4 Results obtained from quarterly dataset .................................................. 72
Table 3.A1 Data information .................................................................................... 74

Table 4.1 Sample statistics..................................................................................... 86
Table 4.2 VAR results............................................................................................ 88
Table 4.3 Results obtained from the use of alternative smoothing parameters....... 107
Table 4.A1 Data information .................................................................................. 109
List of Abbreviations


AR Autoregressive
CL Constant liquidity
e.g. for example (exempli gratia)
excl. excluding
GDP Gross domestic product
i.e. that is (id est)
IID Independently and identically distributed
IIDN Independently and identically normal distributed
incl. including
IPD Investment Property Databank
MIT Massachusetts Institute of Technology
MPRP Marketing period risk premium
NCREIF National Council of Real Estate Investment Fiduciaries
NPI NCREIF Property Index
OLS Ordinary least squares
p.a. per annum
RE Real estate
REIT Real estate investment trust
St.dv. Standard deviation
TBI Transaction-Based Index
VAR Vector autoregression
VL Variable liquidity List of Abbreviations viii
UK United Kingdom
US United States
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List of Symbols


a Smoothing parameter
c Vector of transaction costs
C( j) j-th order autocovariance of the vector z t+1
Corr(·) Correlation operator
Cov(·) Covariance operator
Cov (·) Conditional covariance operator t
CR Cap rate at time t t
CRU Simple nominal capital return (unsmoothed) in period t t
CV Capital value index at time t t
diag(·) Diagonal of
d p Mean log cash-payout-yield
exp(·) Exponential operator
e1 Vector where the first element is one and the other elements are zero
Vector where the second element is one and the other elements are zero e2
E(·) Expectation operator
E (·) Conditional expectation operator t
f Mathematical function
g True continuously compounded real capital return on real estate in period t t
Appraisal-based continuously compounded real capital return on real estate in
*g
t
period t
I Inflation rate in period t +1 t+1
i Continuously compounded inflation rate in period t +1 t+1
(k )i Continuously compounded k-period inflation rate t+k
Sample average of continuously compounded inflation rates i
I Identity matrix
Inc Real estate income in period t t
IR Income return on real estate in period t t
Income return on real estate with regard to unsmoothed capital value index in
IRUt
period t List of Symbols x
j Index variable
k Investment horizon
k* Period after which the marketing activities begin
ln(·) Natural logarithm operator
m Marketing period
M A selector matrix n
M A selector matrix r
n Vector of continuously compounded nominal returns in period t +1 t +1
(k )n Vector of continuously compounded k-period nominal returns
t+k
Continuously compounded nominal return on the benchmark asset in period
n 0,t+1
t +1
(k )n Continuously compounded k-period nominal return on the benchmark asset 0,t+k
(k )n Continuously compounded k-period nominal portfolio return p,t+k
Sample average of continuously compounded nominal returns on the
n
0
benchmark asset
p Order of vector autoregressive process
P Persistence measure
Continuously compounded real return in period t +1+ j r t+1+ j
r Vector of continuously compounded real returns in period t +1 t+1
(k )r Vector of continuously compounded k-period real returns
t+k
r Continuously compounded real return on the benchmark asset in period t +10,t+1
(k )r Continuously compounded k-period real return on the benchmark asset 0,t+k
r Continuously compounded k-period real return on real estate, per period RE,t+k
(k )r Continuously compounded k-period real portfolio return p,t+k
r Sample average of continuously compounded cash returns 0
R Nominal return in period t +1 t+1
2R Goodness of fit
RER Total return on real estate in period t t
s Slope of the term structure of the periodic expected real return on real estate
s Vector of state variables at time t +1 t+1