Shaun A. Bond

The Conditional Distribution of Real Estate Returns: Are Higher Moments Time Varying?

Previous research has shown that the returns on individual properties and listed property securities are skewed. This claim is investigated in the context of listed U.K. property companies and U.S. REITs. In particular, the shape of the conditional distribution of total monthly returns is examined for a group of 20 U.K. companies and 20 REITs. Also investigated is the claim that the skewness found in property returns varies over time. Using the model of Hansen (1994), it is found that while a large portion of property security returns in the sample do exhibit skewness in the conditional distribution only in a few instances is there time variation in the skewness parameter. There is little evidence to suggest that skewness is associated with the economic cycle.

Smoothing, Nonsynchronous Appraisal and Cross-Sectional Aggregation in Real Estate Price Indices

In this article three econometric issues related to private-equity return indices, such as real estate indices, are explored (smoothing, nonsynchronous appraisal and cross-sectional aggregation). Under certain assumptions, it is found that index returns based on appraisals follow an ARFIMA(1, d, 1) (autoregressive fractionally integrated moving average) process, where the long memory parameter (d) explains the level of smoothing and the AR and MA parameters represent the level of persistence in marketwide fundamentals and the nonsynchronous appraisal, respectively. The empirical results show that: (1) the level of smoothing in appraisal-based real estate indices is far less than assumed in many academic studies (2) there is weak evidence of nonsynchronous appraisal in the UK, IPD (Investment Property Databank) index and (3) marketwide fundamentals are highly persistent for the IPD index returns. On the other hand, there is no evidence of nonsynchronous appraisal or a persistent common factor in the U.S. NCREIF (National Council of Real Estate Investment Fiduciaries) index.

Statistical properties of the sample semi-variance

In finance theory the standard deviation of asset returns is almost universally recognized as a measure of risk. This universality continues to exist even in the presence of known limitations of using the standard deviation and also an extensive and growing literature on alternative risk measures. One possible reason for this persistence is that the sample properties of alternative risk measures are not well understood. This paper attempts to compare the sample distribution of the semi-variance with that of the variance. In particular, the belief that, while there are convincing theoretical reasons to use the semi-variance the volatility of the sample measure is so high as to make the measure impractical in applied work, is investigated. In addition arguments based on stochastic dominance are also used to compare the distribution of the two statistics. Conditions are developed to identify situations in which the semi-variance may be preferred to the variance. An empirical example using equity data from emerging markets demonstrates this approach.

Certification Matters: Is Green Talk Cheap Talk?

There is an active and growing literature examining the rental rate, sales price, and occupancy premiums associated with sustainable or energy efficient certified real estate. To date, the focus has rested largely on office properties and for sale single family residential properties. We examine the rental rates achieved by green multifamily properties, providing the first look at the population of LEED market-rate apartments in the United States. We find an approximate 8.9 percent rental rate premium associated with LEED apartments. Moreover, this research provides the first indication that LEED certification garners an additional premium over non-certified space that identifies as green, indicating the strength of the certification signal and contributing to the longstanding discussion on the merits of certification.

Commercial Real Estate Returns: An Anatomy of Smoothing in Asset and Index Returns

In this article, we investigate the commonly used autoregressive filter method of adjusting appraisal-based real estate returns to correct for the perceived biases induced in the appraisal process. Many articles have been written on appraisal smoothing but remarkably few have considered the relationship between smoothing at the individual property level and the amount of persistence in the aggregate appraisal-based index. To investigate this issue we analyze a large sample of appraisal data at the individual property level from the Investment Property Databank. We find that commonly used unsmoothing estimates at the index level overstate the extent of smoothing that takes place at the individual property level. There is also strong support for an ARFIMA representation of appraisal returns at the index level and an ARMA model at the individual property level.

Asymmetry and Downside Risk in Foreign Exchange Markets

This paper evaluates the double gamma distribution as a means of modelling asymmetry in the conditional distribution of financial data. To do this the model is applied to ten exchange rate series covering mature and emerging market countries. A second contribution of this paper is to highlight the link between the double gamma distribution and the measurement of the second lower partial moment (or semi-variance). The resulting empirical performance of the double gamma model is found to be mixed when compared to a symmetric GARCH-t model. Estimates of conditional downside risk based on the double gamma model are constructed for each series. The results for the Malaysian Riggit, Zimbabwe Dollar and the Korean Won demonstrate the extreme downside volatility experienced by these countries during the emerging markets currency crisis.

An analysis of commercial real estate returns: an anatomy of smoothing in asset and index returns

In this article, we investigate the commonly used autoregressive filter method of adjusting appraisal-based real estate returns to correct for the perceived biases induced in the appraisal process. Many articles have been written on appraisal smoothing but remarkably few have considered the relationship between smoothing at the individual property level and the amount of persistence in the aggregate appraisal-based index. To investigate this issue we analyze a large sample of appraisal data at the individual property level from the Investment Property Databank. We find that commonly used unsmoothing estimates at the index level overstate the extent of smoothing that takes place at the individual property level. There is also strong support for an ARFIMA representation of appraisal returns at the index level and an ARMA model at the individual property level.

The Information Content of Real Estate Derivative Prices

The objective of this research was to assess whether forward returns implied by real estate derivative prices provide a more accurate measure of future real estate returns than a consensus forecast of industry experts. Implied returns derived from real estate derivative prices are often used by industry participants as forecasts of future returns, even though the theoretical justification for this is limited. Bond and Mitchell’s analysis suggests that since the introduction of real estate derivatives in the U.K., real estate derivatives prices have provided a better indication of future returns than a consensus forecast. But most of this apparent superior performance can be attributed to publication delays with the consensus forecasts. When adjusted for publication delay, the information content of real estate derivatives is shown to be remarkably similar to the consensus forecasts. The authors also caution that as the market for real estate derivatives develops, a greater divergence may emerge between market forecasts and real estate derivatives prices.

The Optimal Portfolio Weight for Real Estate with Liquidity Risk and Uncertainty Aversion

In this paper we investigate the portfolio implications of liquidity costs and uncertainty aversion across asset classes. In many cases, financial securities such as equities trade in active markets in which equity owners can liquidate their holdings quickly and with little price concession. In contrast, real assets, such as commercial real estate, may take a substantial amount of time to sell and entail significant transactions costs. For this we focus on literature that considers the impact of uncertainty (as opposed to risk) on portfolio choice (Garlappi, Uppal, and Wang, RFS 2007), and extend this to include a measure of the liquidation costs of assets. In particular, our paper examines the optimal relative weight of real estate in a portfolio when both liquidity costs and the uncertainty regarding sample inputs are considered. We find large increases in the ex-post Sharpe ratio result when liquidity costs and uncertainty aversion are incorporated in portfolio selection relative to a naive portfolio that ignores liquidity costs and uncertainty.

Asymmetry, Loss Aversion, and Forecasting

Conditional volatility models have been used extensively in finance to capture predictable variation in the second moment of returns. However, with recent theoretical literature emphasizing the loss-averse nature of agents, this paper considers models that capture time variation in the second lower partial moment. Utility-based evaluation is carried out on several approaches to modeling the conditional second-order lower partial moment. The findings show that when agents are loss averse, there are utility gains to be made from using models that explicitly capture this feature. These results link the theoretical discussion on loss aversion to empirical modeling.