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Coskewness in European Real Estate Equity Returns Tobias Dechant Kai-Magnus Schulte. Coskewness in European Real Estate Equity Returns Aim of the Paper pricing of European real estate equities cross-section relationship between coskewness and European real estate equity returns
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Coskewness in European Real Estate Equity Returns • Tobias Dechant • Kai-Magnus Schulte
Coskewness in European Real Estate Equity Returns • Aimofthe Paper • pricingof European real estateequities • cross-sectionrelationshipbetweencoskewnessand European real estateequityreturns • higherreturns on equitieswhichcontributenegativelytoequitymarketskewness • Motivation • real estatecharacteristicsdemandfortheanalysisofcoskewness in assetpricing • almostnoevidenceforthe European real estatemarket • someevidencefortheexplanatory power ofcoskewness in global real estateequities
Methodology • Time Series Regressions (Fama & French 1993, 1996, 1997) • rolling time seriesregressionstodeterminefactorriskpremia • Cross SectionRegressions (Fama & McBeth 1973, Harvey & Siddique 2000) • explainingcrosssectionreturndifferencesbyregressingequityreturns on factorriskpremia • Conditional Cross SectionRegressions (Pettengill et al. 1995, 2000) • explainingcrosssectionreturnsdifferencesbyregressingequityreturns on factorriskpremiaconditional on thestateoftheequitymarket
Data • Thomson Reuters Datastream/Global Property Research (GPR) • 16 European countries • June 1988 - June 2009 • datafrequency: monthly • 275 (Ø 102) real estateequities (screeningaccordingto Ince und Porter, 2006) • 9.662 (Ø 3.864)generalequities(screeningaccordingto Ince und Porter, 2006) • currency: Euro • equitymarketreturn: equallyweightedreturn on all availableequities • riskless rate ofreturn: equallyweighted „OneMonth Interbank Rate“ of all 16 countries
Constructing Portfolios • reducingidiosyncraticrisk in returns • sequentialsorting (LiewandVassalou, 2000) • sortingdate: end of June eachyearfrom 1988 to 2009 • sortingcriteria: • marketcapitalisation (ME) • bookequity/marketequity (BE/ME) • breakpoints • ME: quartiles • BE/ME: quartiles • 16 real estateportfoliosfor time seriesregressions
Coskewnessand Asset Pricing (1) • Definition Coskewness • contributionofassetskewnesstoskewnessofthemarketportfolio • preferencefor positive skewness (Kraus & Litzenberger 1976; Scott & Horvath 1980) • assetwhichincreases (decreases) marketskewnessshould, on average, yield a lower (higher) return • expectedprefix in crosssectionregressionsdependent on marketskewness
Coskewness und Asset Pricing (2) • Coskewnessaccordingto Harvey & Siddique (2000) • residualsfrom CAPM regression • unconditionalmeasuresofcoskewness (not dependent on marketskewness) • easierinterpretation in crosssectionregressions
Model (1) • Rolling Time Series Regressions • Determination ofFactorRiskPremia: • modelling time variation in factorriskpremia • rollingwindowof 60 months (check forrobustness: 48 months, 72 months)
Model (2) • Unconditional Cross SectionRegressions • Regression of Equity Returns on Portfolio FactorLoadings (g2i) • monthlycrosssectionregressionsfromJuly 1993 to June 2009 • explainingreturndifferencesbyrollingfactorriskpremia • meanvalueof „gammas“ indicatesexplanatory power
Model (3) • Conditional Cross SectionRegressions • Conditioningcrosssectionregressiondepending on thestateoftheequitymarket • If an assetisclassifiedasriskythere must besomestates in whichitsreturnisbelowthatof a less riskier asset • with
Results (2) – Base Model (EquallyWeighted) • Almostnoexplanatory power ofcoskewnessneitherunconditionalnorconditional
Results (3) – Controlling forWeightingEffects • weakconditionalexplanatory power whenweightingeffectsareconsideredfor
Results (4) – Controlling for Currency Effects • conditionalexplanatory power whencurrencyeffectsarecontrolledfor
Summary & Implications • Coskewnessand Returns on European Real Estate Equities • noexplanatory power in unconditonalmodels • indicationfortheexplanatory power ofcoskewness in conditionalmodels • explanatory power ofcoskewnessdepends on the model • coskewnessprovestobesignificantwhencurrencyeffectsareconsidered • relationshipbetweenmarketcapitalisation , momentumandcoskewness • RoleofCoskewnessrequires • moreattention in real estateassetpricing • moreresearch
Formung der systematischen Risikofaktoren HML und SMB • Nach Portfolioformierung: S1/B1, S1/B2, S1/B3, S2/B1, S2/B2, S2/B3 • SMB: S1/B1 + S1/B2 + S1/B3 – (S2/B1 + S2/B2 + S2/B3) • Risikofaktor assoziiert mit der Größe einer Firma • HML: S1/B1 + S2/B1 – (S1/B3 + S2/B3) • Risikofaktor assoziiert mit der Bewertung einer Firma
Ergebnisse (1) • Zeitreihenregressionen – 6 Portfolien
Ergebnisse (2) • Zeitreihenregressionen – 25 Portfolien: 1988 – 2009
Ergebnisse (3) • Zeitreihenregressionen – 25 Portfolien: 1988 – 1998
Ergebnisse (4) • Zeitreihenregressionen – 25 Portfolien: 1999 – 2009
Coskewnessand Asset Pricing (2) • marketSkewnesscoskewnessexpectedsign (CS) • positive negative • positive • negative negative • positive positive • negative • negative Positive • expectedsign in crosssectionregressionsshouldbeoppositetomarketskewness
Modell (2) • Rollierende Zeitreihenregressionen – Bestimmung der Faktorrisikoprämien • Monatlich rollierend durchgeführte Zeitreihenregressionen von Juni 1988 bis Juni 2008 • Zeitraum jeder einzelnen Regression: 60 Monate • Abbildung der Zeitvariation des systematischen Risikos
Coskewness und Asset Pricing • Empirische Evidenzen • Kraus & Litzenberger (1976) • Friend & Westerfield (1980) • Barone-Adesi (1985) • Fang & Lai (1997) • Harvey and Siddique (2000) • Smith (2007) • Ngyen& Puri (2009)
Coskewness und Asset Pricing (2) • Coskewness nach Harvey & Siddique (2000) • Beide Coskewness-Maße unkonditioniert (nicht abhängig von der Marktschiefe) • Einfachere Interpretation in Querschnittanalysen • Risikomaße rollierend über 60 Monate bestimmt
Model (4) • RobustnessofResults • currencyeffects • weightingeffects • countryeffects
Results (4) – Controlling for Country Effects • conditionalexplanatory power whencountryeffectsareconsideredfor