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Asset and Risk Pricing

Paper Session

Saturday, Jan. 6, 2024 2:30 PM - 4:30 PM (CST)

Marriott Rivercenter, Conference Room 6
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Tarik Umar, Rice University

What Performance Measures Do Investors Chase? Evidence from Real Estate Mutual Funds

Ryan Chacon
,
University of Colorado-Colorado Springs
Pratik Kothari
,
Oakland University
Thibaut Morillon
,
Elon University

Abstract

We investigate how real estate mutual fund (REMF) investors evaluate performance when choosing where to allocate capital. Using an exhaustive list of performance metrics ranging from the simplest to the most complex, we find that investment performance evaluations differ depending on the type of investor. Using a measure to approximate retail and institutional oriented funds, we find that fund flows into retail-oriented funds are driven mostly by simple unadjusted returns. Fund flows into institutional oriented funds are best explained by CAPM alphas using a REIT index as the market index. Additionally, although REIT-based multi-factor models appear to explain REMF performance the best empirically, they are the least likely to be used to benchmark performance by both retail and institutional investors. These findings shed light on the ongoing debate of the level of sophistication of mutual fund investors.

Whither Diversification?

John Cotter
,
University College Dublin
Stuart Gabriel
,
University of California-Los Angeles
Richard Roll
,
California Institute of Technology

Abstract

Asset diversification long has been fundamental to investment risk mitigation. We introduce a novel intuitive measure of investment diversification potential. Using this measure, we compute new long-term country-specific indices of diversification potential for equity, sovereign debt, and real estate. Findings for the 1986-2021 study period indicate markedly declining or persistently dampened diversification potential for all asset classes. Declines in diversification potential for equities are especially pronounced among developed nations and coincide with higher levels of investment risk. Country-level panel analysis indicates that declines in diversification potential are associated with increases in internet diffusion, country economic development, the TED spread, political risk, and institutional ownership. Diversification potential waned temporarily among all asset classes during the 1992 ERM crisis and at the onset of the COVID-19 pandemic. Findings offer a cautionary note regarding diversification of investment risk among asset classes and geographies in a connected and interdependent world.

Asset Heterogeneity, Market Fragmentation, and Quasi-Consolidated Trading

Wei Li
,
Johns Hopkins University
Zhaogang Song
,
Johns Hopkins University

Abstract

Asset heterogeneity is widely believed to restrict liquidity in many markets involving important fixed-income assets. We model the impact of quasi-consolidated (QC) trading---a design that allows sellers to deliver heterogeneous assets for identical payments---on over-the-counter (OTC) markets involving assets with varying values. We show that allowing for QC trading reduces market fragmentation but introduces a cheapest-to-deliver (CTD) effect. In consequence, although QC trading increases total trading volume and social welfare, it hurts liquidity for sellers who do not switch to QC trading and lowers profits for both these sellers and some other sellers who switch to QC trading. Consolidating multiple QC contracts increases (decreases) total trading volume and social welfare if the contracts cover assets with similar (distinct) values.

The Cost of Being Allies – Rare Disaster Risk on Value of Real Estate Investment

Chongyu Wang
,
Florida State University
Rose Neng Lai
,
University of Macau
Martin E. Hoesli
,
University of Geneva and University of Aberdeen

Abstract

Treating the Russian invasion of Ukraine as a rare disaster event and defining proximity as both physical distance and political closeness, we analyze investors’ response to disaster risk by examining the performance of commercial real estate investments in countries of proximity to the event. We find that proximity to the war matters, but the impact of the disaster is not uniform across different property types. Firms with green and less obsolete properties are less likely to experience negative abnormal returns. Our findings highlight the differences in equity risk premia even within the same industry facing the same disaster, thereby contributing to the origins of internationalization “discount.” We also find support for the eminence of reducing reliance on brown fuel.

Discussant(s)
David Ling
,
University of Florida
Ben Matthies
,
University of Notre Dame
Jiakai Chen
,
University of Hawaii-Manoa
Parinitha Sastry
,
Columbia University
JEL Classifications
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location
  • G2 - Financial Institutions and Services