Re-examining the modelling of yields in a volatile market
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Re-examining the modelling of yields in a volatile market  by Ben Burston DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 3011 Email: [email protected] Kostis Papadopoulos DTZ, 125 Old Broad Street, London, EC2N 2BQ

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Re-examining the modelling of yields in a volatile market  by Ben Burston

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Re examining the modelling of yields in a volatile market by ben burston

  • Re-examining the modelling of yields in a volatile market

  •  by

  • Ben Burston

  • DTZ, 125 Old Broad Street, London, EC2N 2BQ

  • Tel: +44 (0)20 3296 3011 Email: [email protected]

  • Kostis Papadopoulos

  • DTZ, 125 Old Broad Street, London, EC2N 2BQ

  • Tel: +44 (0)20 3296 2329 Email: [email protected]

  • &

  • Tony McGough

  • DTZ, 125 Old Broad Street, London, EC2N 2BQ

  • Tel: +44 (0)20 3296 2314 Email: [email protected]

  • Paper presented at the 17th European real Estate Society Conference,

  • Milan, Italy – June 23rd 26th 2010.

  • Draft paper: Not to be quoted without permission from the authors.


Re examining the modelling of yields in a volatile market by ben burston

Introduction

  • Methodology

  • Model

  • Impact of global volatility

  • Implications of modelling output


Re examining the modelling of yields in a volatile market by ben burston

Introduction

Methodology

  • Previous model (Hicks & McGough 2005) provided a framework for our yield analysis

  • Previous equation looks at impact of

    • Rental expectations

    • Bond prices

    • Fixed risk premia via constant

  • Present model

    • Incorporates transaction volumes

    • Money supply


Re examining the modelling of yields in a volatile market by ben burston

Issue of pricing of risk


Re examining the modelling of yields in a volatile market by ben burston

Yield history and financial pricing within markets

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Testing for a breakpoint in 2003

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Data used

  • Variables

    RR = real rents

    Bond = 10 year government bond

    Divy = Dividend Yield

    Trvn = transaction volume numbers

    RMoney = Real money supply

  • Time Series Quarterly 1997 2009

  • London Office rents


Re examining the modelling of yields in a volatile market by ben burston

Yield equation to 2003 - bonds

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Yield equation to 2003 - bonds

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Yield equation to 2003 – dividend yields

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Full model to 2009 Q4 - bonds

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Full model to 2009 Q4 – dividend yields

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Full model to 2009 Q4 – key findings

  • Changes in relationships

  • Bond relationship turns negative

  • Dividend yield relationship insignificant

  • Serial correlation appears

  • Why?

  • Chasing the yield

  • Outward movement of yields following financial crisis

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Full model to 2009 Q4 – solutions

  • Need to incorporate other variables into this analysis

  • In particular risk measures and time varying premia

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Risk pricing from near zero to 400 bps


Re examining the modelling of yields in a volatile market by ben burston

Full model to 2009 Q4

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Full model to 2009 Q4

Source :DTZ Research


Re examining the modelling of yields in a volatile market by ben burston

Conclusions

London (City)

  • Structural break found in yield relationships using old methodology

  • Previous relationships have changed in the current environment

  • More sophisticated modelling of risk needed to take into account more volatile risk markets

London (West End)

Madrid

Paris

Sydney

Frankfurt

New York

Shanghai

Tokyo

Source: DTZ Research


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