Forward Curve Risk Factors Analysis in the UK Real Estate Market

Forward Curve Risk Factors Analysis in the UK Real Estate Market This paper empirically investigates the risk factors of the property swap prices using 4 years of price data relative to the UK Investment Property Databank (IPD) Total Return All Property Swap. The implied forward rates are analyzed with a first difference model to determine its main components. Regarding the risk free rate, the traditional sport-forward relation does not hold for property derivatives. The impact of the risk free rate on forward rates appears as being complex and made of different effects; it varies according to time and maturities. Derivatives prices take into account the smoothing effect of the underlying index and REITs stocks are also relevant to explain these prices. The informational content of the swap is important. The impact of the REITs and of the smoothing decreases with maturities. The risk factor structure obtained is more complex than found in many other studies relative to commodities, securities or bonds. Possible reasons for this phenomenon are discussed. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Forward Curve Risk Factors Analysis in the UK Real Estate Market

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Publisher
Springer US
Copyright
Copyright © 2015 by Springer Science+Business Media New York
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1007/s11146-015-9534-z
Publisher site
See Article on Publisher Site

Abstract

This paper empirically investigates the risk factors of the property swap prices using 4 years of price data relative to the UK Investment Property Databank (IPD) Total Return All Property Swap. The implied forward rates are analyzed with a first difference model to determine its main components. Regarding the risk free rate, the traditional sport-forward relation does not hold for property derivatives. The impact of the risk free rate on forward rates appears as being complex and made of different effects; it varies according to time and maturities. Derivatives prices take into account the smoothing effect of the underlying index and REITs stocks are also relevant to explain these prices. The informational content of the swap is important. The impact of the REITs and of the smoothing decreases with maturities. The risk factor structure obtained is more complex than found in many other studies relative to commodities, securities or bonds. Possible reasons for this phenomenon are discussed.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Nov 9, 2015

References

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