Hany Guirguis

Have leveraged and traditional ETFs impacted the volatility of real estate stock prices

Exchange Traded Funds (ETFs), including the innovative leveraged (long and inverse) types, and the ever more creative traditional versions, are accelerating in popularity as preferred investment and trading vehicles. Real estate, a major investment sector, has been made more accessible through these tools. This study investigates if the introduction of real estate ETFs is impacting the volatility of their underlying real estate stocks. Tests conclude that the introduction of leveraged (long and inverse) and traditional real estate and real estate related ETFs, linked to the Dow Jones US Real Estate and Financial Indices and the leveraged (long and inverse) ETFs, benchmarked to the Russell 1000 Financial Services Index, significantly increased the volatility in their component real estate stock prices. The leveraged ETFs tied to the Dow Jones US Real Estate and Financial Indices caused the highest volatility, approximately tripling the volatility in the underlying real estate securities. Traditional ETFs were second, causing slightly more than a 70% increase in volatility, while the leveraged ETFs linked to the Russell 1000 Financial Services Index, having induced a 50% increase in volatility, were third. The increased volatility could not be attributed to any other external event.

The 2008 Financial Crisis and the Dynamics of Price Discovery Among Stock Prices, CDS Spreads, and Bond Spreads for US Financial Firms

Proliferation of traded derivatives that relate to the same underlying—such as stocks, bonds, and credit default swaps (CDS) all tied to the value of an underlying firm—raises questions about which instrument leads the adjustment to a new equilibrium when information enters the market. In this article, the authors explore the issue of using CDS, bonds, and stocks of 10 financial firms before and during the crisis of 2008. Using a cointegration framework, they calculate each security’s contribution to overall price discovery. They find the stock market to be the most informative, followed by the CDS market, with the bond market least of all. Before the crisis period, about two-thirds of price discovery occurred in the equity market and about one-quarter in the CDS market. From fall 2007 through 2008, however, the influence from stocks dropped to about 50%, while the CDS market’s contribution increased to close to 40%.

Properly estimating the liquidity effect: why accounting for stationarity and outliers is important

Abstract The impulse responses of the federal funds rate to innovations in the non-borrowed reserves are re-examined. The rolling responses reveal that, by correcting for the non-stationarity of the data and including the error correcting terms in the VARs, the liquidity effect found by Christiano and Eichenbaum 1991 , Christiano and Eichenbaum 1992b , and 1994 ) is shortened from six to two months. The rolling responses also locate an outlier between the non-borrowed reserves and the funds rate in May 1980. Once the observation of May 1980 is excluded from the samples, the evidence of the liquidity effect becomes much weaker.

Should Tracking Error Prevent the Use of Leveraged ETFs in the Real Estate Portfolio

Tracking error is the deviation of a leveraged exchangetraded fund’s (ETF’s) return from the stated multiple of its benchmark index. Leveraged real estate and real estate–related ETFs, both long and inverse, are valuable tools for hedging risk and enhancing returns in the real estate portfolio. They enable the achievement of such results through timely, simple transactions that previously could be realized only through the use of complex trading tools. Tracking error poses a serious risk in the use of these leveraged ETFs, however. The issuers and regulators of leveraged ETFs warn that the returns to these funds over a period longer than one day will very likely differ from the fund’s target return. Academic researchers further warn that annual leveraged ETF returns fall well short of their stated daily objectives and, under volatile conditions in the benchmark index, can lead to eventual value destruction. The results of this research confirm the appropriate concern for caution in using leveraged ETFs. Naïve buy-and-hold investment in leveraged real estate ETFs can result in value destruction. Nevertheless, balancing the advantages of leveraged ETFs with the risks, we conclude that the tracking error associated with using leveraged ETFs beyond a single trading day should not prevent investment managers from using these ETFs in real estate portfolios. To be sure, leveraged ETFs are valuable tools for use in hedging risk and enhancing returns and, under appropriate circumstances, with great care and frequent monitoring, can be judiciously employed for longer than a single trading day by skilled traders and well-informed portfolio managers.

The post-offering performance of IPOs in the health care industry

This paper investigates the post-offering performance of initial public offerings in the health care industry in a sample of 223 IPOs issued between 1985 and 1996. Statistically insignificant abnormal returns for IPOs relative to matched control firms and risk-adjusted health care index are evident for the whole sample. Thus, our empirical results support the overall information efficiency in the IPO market. However, numerical and statistical differences of the IPOs’ abnormal returns are documented in every subgroup specified according to the issuance years and sectors. We conjecture that such differences are due to the growing threat of government intervention and the significant structural changes.(JEL11, C11)

Stock Price Volatility of Banks and Other FinancialsEmanating from the Inception ofLeveraged, Inverse, and Traditional ETFs

Changes in stock price volatility of banks and other financials resulting from the inception of the first-ever, leveraged, inverse and traditional, purely financial exchange-traded funds (ETFs) are investigated. Financials have become much more accessible to investors through these creative and increasingly popular ETF securities. Results from using a constant-variance, first-order, Markov regime-switching model show a significant increase in the volatility of banks and other financials following the introduction of XLF, the traditional ETF representing the Financial Select Sector SPDR, and the leveraged (long and inverse) ETFs, UYG and SKF, benchmarked to the Dow Jones U.S. Financials Index. Volatility emanating from the inception of the leveraged ETFs was several orders of magnitude greater than that of the traditional ETF. Banking and large-cap financials were most prominently affected by the XLF. All sectors and size categories of financial firms were significantly impacted by UYG and SKF, the leveraged ETFs.

On the Use of Leveraged-Inverse ETFs to Hedge Risk in Publicly Traded Mortgage Portfolios

The authors evaluate U.S. Treasury and real estate indexed leveraged-inverse exchanged traded funds (LIETFs), mortgage-based put options, and real estate futures as risk hedges in publicly traded mortgage portfolios under conditions of large and rapid interest rate increases. They find that two LIETFs, TBT and TTT, indexed to U.S. 20+ year T-bonds, were the most effective and efficient risk hedges. TTT performed the best. TYO, a LIETF indexed to 7–10 year U.S. T-notes, performed poorest overall. Liquidity issues limited the effectiveness of mortgage-based put options. Real estate futures proved less successful than the best of the LIETFs. The authors find that the advantages of LIETF include simplicity of implementation, limited loss potential, and high liquidity; additionally, tracking error was not a problem over the lengthy risk hedge implementation period for the LIETFs. The authors conclude that the potential for severe tracking error, when used beyond a single trading day, is the primary limitation of LIETFs, so caution is appropriate, and frequent monitoring and management by skilled traders and well-informed portfolio managers are essential.

The Living Wage and the Effects of Real Minimum Wages on Part-time and Teen Employment

In many parts of the country, campaigns are being carried out and laws are being passed whose aim is to establish, among other things, standards for contracting out public services and setting acceptable living wages that will provide employees decent living standards. Living wages have economic consequences on employment of different groups of workers such as part-time, teenagers, and women and detailed data are needed to measure those effects. In the absence of such data and because of the strong link between living and minimum wages, this study tests the potential impact of living wages by using the model of minimum wages. The study documents a negative and significant relationship between real minimum wages and the employment levels of the various groups. The study also recommends better training and education, free competition in the labor market, and fair compensation based on the workers productivity as justifiable means to achieve a sustainable level of living wages without causing an unemployment repercussion.

Hedge Funds and the Housing Bubble

This article documents that hedge funds specializing in subprime mortgages did not take advantage of the housing bubble and they did not trade against it. Hedge fund capitalization is an important factor regarding how funds suffered during the crisis. Small funds suffered the most. Mid-cap portfolio relied on macroeconomic indicators (subprime foreclosures) and, as a result, suffered less compared to their peers above. Duration and quality of the credit instruments are significant factors in explaining hedge fund returns. Naturally, our study, in line with the existing literature during turbulent periods, documents that the lack of liquidity was a key driver of performance.

Modelling the Blind Principal Bid Basket Trading Cost

A blind principal bid (BPB) is one of the mechanisms for simultaneously trading a basket of stocks at a pre‐determined execution price. In a BPB, asset managers auction a basket of stocks directly to liquidity providers who do not know the identities of the individual stocks in the basket. Unlike other methods of trading, the cost and composition of the BPB basket are not reported in a standard and timely manner. Complete basket data are available only to the asset manager and the broker who won the auction. The current literature contains very little information on the BPB phenomenon, largely due to a lack of public data for research. This paper analyses a unique dataset of 140 executed baskets, building on the seminal papers of Kavajecz and Keim (2005) and Stoll (1978a, b) to develop empirical and structural models of BPB trading costs. Our research provides novel insights into the dynamics of pricing BPB trading costs, a topic that has rarely been examined in the literature. The research reported here also has significant practical applications. Asset managers obtain a benchmark for evaluating the lowest bid, and brokers obtain qualitative insights that can aid them in formulating their bids.