Walter Dolde

Temporal and Spatial Information Diffusion in Real Estate Price Changes and Variances

This article examines patterns of temporal and spatial diffusion of real estate price changes. In addition to means, changes in volatility are tracked in reaction to substantial new information, estimated with GARCH-M methods. The data covers towns in Connecticut and near San Francisco. There is evidence of negative feedback at short lags, contrary to previous research on housing and other assets. There is also evidence of a moving average error process which tends to reverse recent shocks. Significantly positive spatial information diffusion is found from neighboring towns in Connecticut but none in control tests on nonneighboring towns. The results also include evidence of a risk-reward tradeoff in housing price changes in the San Francisco area. Copyright American Real Estate and Urban Economics Association.

Housing Price Volatility Changes and Their Effects

We examine significant volatility shifts in regional housing price changes, adapting a method of Haugen, Talmor and Torous (1991) independent of predefined sampling blocks. We identify 36 volatility events, most of which are purely regional, but three of which are national. We find significant associations of volatility events and economic conditions, especially national and regional income growth, inflation, and interest rates. During an initial adjustment period after a volatility shift, realized housing returns move opposite to volatility. We find evidence of significant interregional diffusion of volatility increases, but not of decreases. New insights on links between economic conditions and housing volatility and returns should be of value to household investors and mortgage investors.

Should Managers Estimate Cost of Equity Using a Two-Factor International CAPM?

Purpose - The purpose of this paper is to assess how much difference it makes for US firms to use the two-factor ICAPM to estimate their cost of equity instead of a single-factor CAPM. Design/methodology/approach - For a large sample of US companies, the authors compare the empirical cost of equity estimates of a two-factor international CAPM with those of the single-factor domestic CAPM and the single-factor global CAPM. Findings - The authors find that the cost of equity estimates of the two-factor ICAPM are reasonably close to those of either single-factor model for US firms with low-to-moderate foreign exchange exposure; and second, perhaps surprisingly, for US firms with extreme foreign exchange exposure, that the cost of equity estimates of the two-factor ICAPM tend to be very close to those of the domestic CAPM, and even closer than to those of the single-factor global CAPM. Research limitations/implications - The papers findings might prove useful to academic researchers wanting to resolve the seemingly contradictory empirical results on the pricing of FX risk. Practical implications - The findings will hopefully help managers decide whether they should go to the trouble of estimating a US firms cost of equity with the two-factor international CAPM instead of a traditional single-factor CAPM. Originality/value - The paper extends the existing literature by focusing on the two-factor ICAPM, and finds some new and surprising empirical results.

Foreign Exchange Exposure and Cost of Equity for U.S. Companies: Local Versus Global CAPM

For U.S. firms with extreme foreign exchange (FX) exposure levels, we ask whether the single-factor global CAPM yields significantly different cost of equity estimates from the local CAPM. For a sample of U.S. firms from 2000-2007, we find a clear and statistically significant relation between the differences of the two models’ cost of equity estimates and the firms’ FX exposure estimates. However, the economic significance is questionable, even for firms with extreme FX exposure levels.

The Nonmonotonic Relation between Insider Ownership and REIT Risk-Taking and Returns

We examine empirically the relations between REIT insider ownership and several measures of performance and management decisions. Three variables exhibit U-shaped or inverted U-shaped profiles, with a critical turn at about 30% ownership. Incentive alignment appears to dominate above 30% ownership; risk aversion and entrenchment dominate from zero to 30%. These phenomena are most pronounced for stock beta and property type concentration. Linear models are inadequate to explain the data, misleadingly indicating the absence of a relationship. Leverage presents an inverted U-shape. G&A expense ratios decline nonlinearly in insider ownership. Institutional ownership is associated with lower leverage, lower expenses, lower ROA, and higher stock returns.

Impact of Corporate Ownership on Risk-Taking and Returns at Thrift Institutions

This paper examines the relationship between ownership structure, other corporate governance variables, and firm risk-taking and returns for the period 1990 to 2003. Our results suggest that the persistent, underlying relationship between insider ownership and risk-taking is U-shaped for both stock and operating returns. The Sharpe ratio for operating returns exhibits an inverted U-shaped association with insider ownership. These observations are consistent with insiders achieving the efficient frontier between risk and return, i.e. although risk-taking varies with the level of ownership, average returns are higher when risk is higher. We also find strong evidence of negative linear relationships between institutional ownership and both operating and stock volatility and positive relationships with operating returns and Tier 1 capital.