The failure of the efficient market hypothesis has a direct bearing on the Geometric Brownian Motion model of asset returns. The current paper aims to investigate the effect that…
Abstract
Purpose
The failure of the efficient market hypothesis has a direct bearing on the Geometric Brownian Motion model of asset returns. The current paper aims to investigate the effect that the autocorrelation in the time‐series of returns has on the calculation of expected shortfall (ES) for an asset‐liability investor.
Design/methodology/approach
The regression model is selected according to the Akaike and the Schwarz information criterion. A series of tests are used to insure the stability of the autocorrelation parameters. Autocorrelation‐adjusted formulas for volatility and cross‐asset correlations are then employed for the computations.
Findings
The presence of autocorrelation changes the values of most of the correlation parameters used in the calculation of the ES of the risk bearing capital (RBC) – in some cases the cross‐asset correlation parameters double. Once the presence of smoothing is accounted for, the ES increases by 1 per cent in relative value.
Research limitations/implications
Other asset classes may also feature smoothed time‐series requiring thus an account of their autocorrelation structure and their interaction with the property asset. An analysis of the time stability of the cross‐asset correlations may also improve the estimation of the optimal RBC.
Originality/value
The proposed method focuses on the proper calculation of the RBC through the judicious estimation of the relevant risk measure for an investor who, while not having access to the underlying data pool from which the property index is computed, cannot adjust the index for the potential presence of temporal aggregation and market illiquidity.
Details
Keywords
Computing the duration of real estate assets is a challenging task due to the particularities of the property market. This paper aims to develop an empirical model to compute the…
Abstract
Purpose
Computing the duration of real estate assets is a challenging task due to the particularities of the property market. This paper aims to develop an empirical model to compute the interest‐rate sensitivity of direct real estate assets in the Swiss multifamily housing market.
Design/methodology/approach
An aggregated total return index is used to empirically estimate the interest‐rate sensitivity of the underlying assets in a dynamic DCF model. No instantaneous change is computed but a long‐run price adjustment.
Findings
The long‐run sensitivity is computed to be roughly 4.5 per cent. The value is found to be statistically significant at the 1 per cent level. The model is estimated over two different time periods and the estimate remains significant over both periods with value changing marginally. Potential reliance of trends when forming expectations is found to be present.
Research limitations/implications
One limitation is that the computed value is valid for a portfolio having a similar composition with the index used for the empirical estimation.
Practical implications
The value of the interest‐rate sensitivity places Swiss direct real estate assets within the European range. The value may be used to compute the risk‐based capital of an institutional investor in as far as the portfolio is similar in composition with the index.
Originality/value
The use of the dynamic DCF model allows one to split the changes in asset prices in changes from interest‐rates and changes from cashflows. No value was previously available for the market of Swiss multifamily properties.