Zsuzsa R. Huszar

The Relationships between Real Estate Price and Expected Financial Asset Risk and Return: Theory and Empirical Evidence

In pricing real estate with indifference pricing approach, market incompleteness is shown to significantly alter the conventional pricing relationships between real estate and financial asset. Specifically, we focus on the pricing implication of market comovement because comovement tends to be stronger in financial crisis when investors are especially sensitive to price declines. We find that real estate price increases with expected financial asset return but only in weak market comovement (i.e., a normal market environment) when investors enjoy diversification benefit. When market comovement is strong, real estate price strictly declines with expected financial asset return. More importantly, contrary to the conventional positive relationship from real option studies, real estate price generally declines with expected financial asset risk. With realistic market parameters, we show that there is a nonlinear relationship between real estate price and financial risk. When the market comovement is strong, real estate price only increases with financial asset risk when the risk is low but eventually declines with the risk when it becomes high. Our cross-country empirical results also show that the relationship between financial market risk and real estate price is non-monotonic, conditional on the degree of market comovement.

Mortgage Lending Regulatory Arbitrage: A Cross-Sectional Analysis of Nonbank Lenders

Nonbank mortgage lenders originated more than half of the risky subprime mortgage loans prior to 2008 and yet escaped much regulatory scrutiny during the 2008 global financial crisis. In this study, we provide new insights into how these nontraditional lenders became important players in the residential mortgage market. We document large variations in the state licensing requirements for mortgage originators and suggest that some opportunistic nonbank lenders may have entered via less regulated states and engaged in large scale risky loan originations. While these risky loans seemingly served the previously underrepresented borrower base, in the long run, they did not help the state economy and did not promote homeownership creation. Thus, we suggest that low entry barriers for the financial industry should be reviewed and new market entrants should be regularly monitored.

Evaluating Regulators: The Efficacy of Discretionary Short Sale Rules

We examine the efficacy of short sale regulations in Hong Kong, where the list of shortable stocks is managed by regulators and is updated quarterly. While regulators generally cautiously restrict short selling to larger stocks, we show evidence of deviations: some large liquid stocks, which appear to satisfy the regulators’ stated selection criteria, are excluded from the list. In the absence of short sellers, these stocks earn positive excess returns after the list is made publicly available; such price impacts possibly represent an unintended consequence of the short sale regulations. We also find that the likelihood of large liquid stocks being excluded from the list increases in the ownership by Chinese institutions. Overall, our findings suggest that regulatory interventions should be made more transparent to maintain price efficiency.

The Helping Hand of the State in Chinese Real Estate Firms: Anti-corruption and Liberalization

We show that traditional western style corporate governance tools are ineffective in Chinese real estate firms by using data from 2000 to 2012. Instead, we find evidence of effective state governance, such as corruption cleanups and financial market liberalization. Specifically, firms with fewer state connections experience better performance in provinces with greater corruption prosecutions and after 2006 with accelerated stock market liberalization. Overall, our results suggest that the Chinese real estate industry is becoming more market-oriented with assistance from the state.

Efficiency of Regulated and Unregulated FOREX Markets: An Analysis of Onshore and Offshore Renminbi Forward Markets

This study provides new insights about the functioning of Renminbi (RMB) FOREX market by testing the market efficiency in the onshore and offshore RMB FOREX markets. In the onshore and offshore FOREX markets, the RMB forward contracts are designed in similar ways. However, the underlying economic forces and regulatory frameworks are very different in these two markets. We examine the functioning of each market by testing the covered interest rate parity (CIRP) conditions and explore the CIRP deviations in relation to market frictions and government interventions. While the CIRP conditions do not hold in either markets, the offshore market is shown to be more efficient by conveying more private information about investors’ expectation. Overall, we suggest that by opening the offshore market to domestic participants and the onshore market to more foreigners, the forward rates may become more informative with a greater investor mix. These liberalization efforts are important steps in the right directions to improve market efficiency in the Chinese FOREX market.

Active Institutional Investors and Short Sale Constraints around the Global Financial Crisis

In a sample of U.S. stocks, higher stock lending fees predict significantly lower excess returns beyond shorting demand and loan supply. This relation is stronger after October 2008 which is likely attributable to a regime shift in the lending market with the onset of the Global Financial Crisis. We show that active institutional lenders not only respond to demand but also price in private information around earnings news announcements. As lenders raise fees before negative announcement in expectation of higher future shorting demand, they likely create more binding short-sale constraints when short selling could be essential for price discovery.