Motivation Data Research Design Preliminary Results Appendix Property Derivatives in the Strategic Asset Allocation ERES 2009 - Doctoral Session Bertram Steininger IRE|BS, University of Regensburg June 24, 2009 Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
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Property Derivatives in the Strategic Asset Allocation
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MotivationData
Research DesignPreliminary Results
Appendix
Property Derivatives in the Strategic AssetAllocation
ERES 2009 - Doctoral Session
Bertram SteiningerIRE|BS, University of Regensburg
June 24, 2009
Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
MotivationData
Research DesignPreliminary Results
Appendix
Motivation I
I real estate as a major asset classI real estate’s characteristics:
I stability of their valuesI opportunity to hedge against inflationI specific risk-return characteristicsI low co-movements with traditional stock and bond marketsI lot size transformationI transaction costsI no short possibility
However, insufficient asset class for individuals!?
Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
MotivationData
Research DesignPreliminary Results
Appendix
Motivation II
Benefits from property derivatives
I term transformation and liquidity
I transaction costs
I bridge finance and efficient leverage
I short possibility
I lot size transformation
I diversification
I alpha generating
I physical portfolio management
I no property knowledge
Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
MotivationData
Research DesignPreliminary Results
Appendix
Motivation III
Drawbacks from property derivatives
I price to pay
I mark to market risk
I counterparty risk
I liquidity drying up
I lack of traditional alpha
I underlying risk
Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
MotivationData
Research DesignPreliminary Results
Appendix
Motivation IV
UK IPD Certificate: Key Features
I underlying: IPD UK Annual Index under ”All Properties TR”
I ”100% exposure to physical UK commercial property”
I Issuer: Goldman Sachs Jersey (Limited)
I Guarantor: Goldman Sachs Europe and The Goldman SachsGroup, Inc. (A, A1, A+; outlook: -, -, )
I minimum investment: GBP 10.00
I issue date: 26 June 2006
I expiry date: 31 March 2011
I liquidity: continuously quoted on the LSE
I fixed leg: 2.80% p.a.
Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
MotivationData
Research DesignPreliminary Results
Appendix
Motivation V
Studies suggest a optimal allocation of real estate in a mixed assetportfolio of 5-25% (for an overview see e.g. Hoesli, Lekander andWitkiewicz (2004)).The difference between suggested and actual allocation to realestate is considered to be a puzzle in real estate research (Chun,Sa-Aadu and Shilling (2004)).
Can property derivatives solve this puzzle?
I mean-downside-risk analysis
I by using forward contracts with optimal hedge ratios
I 130/30-portfolio strategy
I comparison between ex ante and ex post adjustments
Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
MotivationData
Research DesignPreliminary Results
Appendix
Data CollectionInterpolation
Data Collection
I included asset classes: stocks, bonds, and real estatederivatives
I based on quarterly data from Q1 1996 to Q4 2008
I investment countries: the USA, the UK, France (FRA), andGermany (GER)
Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
MotivationData
Research DesignPreliminary Results
Appendix
Data CollectionInterpolation
Interpolation
Problem: For FRA and GER only annual real estate dataSolution: Interpolation?!
I Nearest neighbor interpolation
I Linear interpolation
I Cubic spline interpolation
I Modified cubic spline interpolation
I Monte-Carlo simulation
Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
MotivationData
Research DesignPreliminary Results
Appendix
Data CollectionInterpolation
Interpolation Comparison
Figure: Comparison of different Spline Interpolation Methods
Bertram Steininger IRE|BS, University of Regensburg Property Derivatives in the Strategic Asset Allocation
MotivationData
Research DesignPreliminary Results
Appendix
Data CollectionInterpolation
Estimation Errors for the USA
The nearest neighbor interpolation (NNI), the linear interpolation (PLI), thecubic spline interpolation (CSI), the modified cubic spline interpolation (MCSI),and the Monte-Carlo simulation (MCS), are compared with the real returns(RR) by dint of the mean (µ), the standard deviation (σ), the coefficient ofvariation (CV), the mean squared error (MSE), and the root mean squarederror (RMSE).