Purpose
– The home is a substantial investment for most individual investors but the assessment of risk and return of residential real estate has not been well explored yet. The existing real estate pricing literature using a CAPM-based model generally suggests very low risk and unexplained excess returns. However, many academics suggest the residential real estate market is unique and standard asset pricing models may not fully capture the risk associated with the housing market. The purpose of this paper is to extend the asset pricing literature on residential real estate by providing improved CAPM estimates of risk and required return.
Design/methodology/approach
– The improvements include the use of a levered β which captures the leverage risk and Lin and Vandell (2007) Time on Market risk premium which captures the additional liquidity risk of residential real estate.
Findings
– In addition to presenting palatable risk and return estimates for a national real estate index, the results of this paper suggest the risk and return characteristics of multiple cities tracked by the Case Shiller Home Price Index are distinct.
Originality/value
– The results show higher estimates of risk and required return levels than previous research, which is more consistent with the academic expectation that housing performs between stocks and bonds. In contrast to most previous studies, the authors find residential real estate underperforms based on risk, using standard financial models.
This paper derives a pricing model for a quanto foreign equity/domestic floating rate swap in which one party pays domestic floating interest rates and receives foreign stock returns determined in the foreign currency, but is paid in the domestic currency. We use the risk-neutral valuation technique developed by Amin and Bodurtha to generate an arbitrage-free pricing model. A closed-form solution is obtained under further restrictions on the drift rates of the asset price processes. Pricing formulae show that the value of a quanto equity swap at the start date does not depend on the foreign stock price level, but rather on the term structures of both countries and other parameters. However, the foreign stock price levels do affect the swap value times between two payment dates. The numerical implementations indicate that the domestic and foreign term structures, the correlation between the foreign interest rate and the exchange rate, and the correlation between the exchange rate and the foreign stock are more important factors in pricing a quanto equity swap than other correlations.Equity swaps, term structure of interest rates, risk-neutral valuation, arbitrage-free pricing model,
This paper examines whether momentum profit and institutional holdings are related. The empirical result shows that after controlled for the size effect, momentum profits are positively related to institutional holdings, especially for small-capitalization firms. Our finding confirms that institution investors tend to have positive-feedback trading in smaller firms. Furthermore, we find that the equity return is positively related to the institutional trading, which supports the hypothesis that institutional investors are better informed than individual investors.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.