Jianping Mei

Credit Spreads in the Market for Highly Leveraged Transaction Loans

This paper is an empirical exploration of the determinants of the required credit spreads on highly leveraged transaction (HLT) loans. The analysis uses a multi-factor spread model to estimate the movement of loan spreads relative to spreads required in the (competing) corporate bond market as well as the significance of loan-specific characteristics in determining loan spreads. The empirical estimates are based on the Loan Pricing Corporation s database which consists of over 4000 loan transactions between 1987-1994. We find a positive HLT loan spread sensitivity to changes in spreads in the corporate bond market, but this sensitivity is significantly less than unity; indicating that the HLT loan market and high yield public debt market are not fully integrated. Furthermore, there is evidence that lenders augment, rather than substitute, loan yield spreads with additional fees for syndication, commitment and cancellation risks. In general syndicated loans have lower yield spreads than other HLT loan types.

Is there a real estate factor premium

In this paper, we study the variation of expected returns on five different asset portfolios in a multi-factor model. We found the presence of a real estate factor, in addition to both a stock factor and a bond factor in asset pricing. This suggests that mutual fund managers should seriously consider including real estate assets in their portfolios, since one cannot capture the real estate factor premium without having some kind of real estate exposure. Another result is that the market segmentation found in previous studies disappears in a more general model of asset pricing in which we allow for multi-factors other than the market factor to affect asset returns. This implies that real estate assets can be treated just like other assets as far as mean-variance efficient asset allocations are concerned. We also have some preliminary evidence that equity REITs and the Russell-NCREIF index are driven by the same underlying real estate factor.

The Predictability of International Real Estate Markets, Exchange Rate Risks and Diversification Consequences

We investigate whether international real estate related securities offer any incremental diversification benefits over foreign stocks using mean-variance analysis together with a multifactor latent variable model. The study finds that diversification benefits are primarily driven by unanticipated returns which in turn are partly driven by changes in exchange rate risk. Although exchange rate risk accounts for a larger portion of the return fluctuation in real estate related securities relative to common stocks, international real estate securities are found to provide some incremental diversification benefits over common stocks even if currency risks are hedged.

The Predictability of Real Estate Returns and Market Timing

Recent evidence suggests that all asset returns are predictable to some extent with excess returns on real estate relatively easier to forecast. This raises the issue of whether we can successfully exploit this level of predictability using various market timing strategies to realize superior performance over a buy-and-hold strategy. We find that the level of predicability associated with real estate leads to moderate success in market timing, although this is not necessarily the case for the other asset classes examined in general. Besides this, real estate stocks typically have higher trading profits and higher mean risk-adjusted excess returns when compared to small stocks as well as large stocks and bonds even though most real estate stocks are small stocks.

Living with the "enemy": an analysis of foreign investment in the Japanese equity market

Abstract This paper studies the impact of foreign investment on domestic financial markets. In particular, it examines the empirical validity of some protectionist claims used by regulators to restrict foreign investment. These people argue that: (1) trading by foreign investors tends to increase market volatility more than trading by domestic investors; (2) foreign investors have more sophisticated investment technology than do their domestic counterparts, causing domestic investors to “lose out” to foreign ones; and (3) foreign investors tend to make investment decisions on the basis of short-term gains rather than long-term fundamentals, such as corporate dividend growth. We find no evidence supporting these claims from the Japanese experience. To the contrary, we find that foreign investors tend to be long-term contrarian players in the market.

The present value model with time-varying discount rates: Implications for commercial property valuation and investment decisions

A vector autoregressive model is developed for predicting cash flow and returns in the private (unsecuritized) commercial property markets. The model predicts both of these variables quite well during the sample period. The forecasting model is then used to develop a simple “buy/sell” rule for identifying property market value peaks and troughs. An improved present value model, taking account of the predictability of property returns, is described and found to track historical market values much more closely than does either the appraisal-based index or the traditional present value model with constant expected returns. Analysis in this paper suggests that most of the change in commercial property market values has been due to changes in expected returns, rather than to changes in expected future operating cash flows.

An Analysis of Real-Estate Risk Using the Present Value Model

The current study uses a present value model that allows for a time-varying expected discount rate in conjunction with a VAR process to decompose real-estate risk. The study finds that the variance ofunexpected returns accounts for most of the total risk with cash-flow risk accounting for twice as much of the unexplained real-estate risk although discount rate risk is also an important factor. This dominance of cash-flow risk is found to result in a weaker mean reversion process for real estate relative to stocks. Another finding is that real estate investors tend to become apprehensive about the future when news on future cash flow is good, and thus they demand higher expected future returns.

Idiosyncratic Risk and Creative Destruction in Japan

The dramatic rise and fall of the Japanese equity market provides a unique opportunity to examine market-and firm-specific risks over different market conditions. The price behavior of Japanese equities in the 1990s is found to resemble that of U.S. equities during the Great Depression. Both show increasing market volatility and a prolonged large co-movement in equity prices. What is unique about the Japanese case is the surprising fall in firm-level volatility and turnover in Japanese stocks after its market crash in 1990. This large decrease in firm-level volatility may have impeded Japans capital formation process as it has become more difficult over the past decade for both investors and managers to separate high quality from low quality firms. Using data on firm performance fundamentals and corporate bankruptcies, we show that the fall in firm-level volatility and turnover in Japanese stocks could be attributed to the sharp increase in earnings homogeneity among Japanese firms and the lack of corporate restructuring.

Have U.S. Financial Institutions' Real Estate Investments Exhibited "Trend-Chasing" Behavior?

This paper uses real estate investment data for major groups of U.S. financial institutionscommercial banks, thrifts, and life insurance companiesto evaluate their investment timing performance over the 19701989 period. Our major finding is that real estate investments by commercial banks and thrifts have largely been driven by past real estate and market returns rather than by future expected returns. This apparent trend-chasing investment strategyof buying high and selling lowoffers an explanation for the poor performance of their real estate investments. We argue that imposing market value accounting on such institutions may actually reinforce their trend-chasing behavior.

Conditional Risk Premiums of Asian Real Estate Stocks

This paper uses a multi-factor latent variable model to examine the time variation of expected returns on Asian property stocks. Using data from 1990 to 1997, we found strong evidence of time-varying risk premium, suggesting property development based on constant discount rate may underestimate the cost of capital. A further study using a multi-country model suggests that conditional excess returns of many crisis-stricken economies appear to move quite closely with each other. This supports the hypothesis that the risk premiums in these Asian markets move closely over time As a result, they provide a partial explanation of market contagion in the region.