Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting
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114
Open-end real estate funds (so called “Offene Immobilienfonds”) play a major role in the German market for securitised real estate investments. Such funds are pools of money from many investors, which are invested in real estate by special investment management companies. This study seeks to identify the risk and return profile of this investment vehicle (before and after income taxes), to compare them with those of other major asset classes, and to provide implications for their appropriate role in a mixed-asset portfolio. Addition-ally, an overview of the institutional architecture and role of German open-end real estate funds is given. Empirical evidence suggests that the financial characteristics of open-end real estate funds are in many respects similar to those reported for direct real estate invest-ments. Accordingly, German open-end real estate funds qualify for medium and long-term investment horizons, rather than for shorter holding periods.
116
Capital rationing is an empirically well-documented phenomenon. This constraint requires managers to make investment decisions between mutually exclusive investment opportunities. In a multiperiod agency setting, this paper analyses accounting rules that provide managerial incentives for efficient project selection. In order to motivate a shortsighted manager to expend unobservable effort and to make efficient investment decisions, the principal sets up an incentive scheme based on residual income (e.g. EVATM). The paper shows that income smoothing generates a trade-off between agency costs resulting from differences in discount rates and the costs associated with the "congruity" of residual earnings.
102
Open source projects produce goods or standards that do not allow for the appropriation of private returns by those who contribute to their production. In this paper we analyze why programmers will nevertheless invest their time and effort to code open source software. We argue that the particular way in which open source projects are managed and especially how contributions are attributed to individual agents, allows the best programmers to create a signal that more mediocre programmers cannot achieve. Through setting themselves apart they can turn this signal into monetary rewards that correspond to their superior capabilities. With this incentive they will forgo the immediate rewards they could earn in software companies producing proprietary software by restricting the access to the source code of their product. Whenever institutional arrangements are in place that enable the acquisition of such a signal and the subsequent substitution into monetary rewards, the contribution to open source projects and the resulting public good is a feasible outcome that can be explained by standard economic theory.
110
An economy in which deposit-taking banks of a Diamond/ Dybvig style and an asset market coexist is modelled. Firstly, within this framework we characterize distinct financial systems depending on the fraction of households with direct investment opportunities that are less efficient than those available to banks. With this fraction comparatively low, the evolving financial system can be interpreted as market-oriented. In this system, banks only provide efficient investment opportunities to households with inferior investment alternatives. Banks are not active in the secondary financial market nor do they provide any liquidity insurance to their depositors. Households participate to a large extent in the primary as well as in the secondary financial markets. In the other case of a relatively high fraction of households with inefficient direct investment opportunities, a bank-dominated financial system arises, in which banks provide liquidity transformation, are active in secondary financial markets and are the only player in primary markets, while households only participate in secondary financial markets. Secondly, we analyze the effect a run on a single bank has on the entire financial system. Interestingly, we can show that a bank run on a single bank causes contagion via the financial market neither in market-oriented nor in extremely bank-dominated financial systems. But in only moderately bank-dominated (or hybrid) financial systems fire sales of long-term financial claims by a distressed bank cause a sudden drop in asset prices that precipitates other banks into crisis.
92
The classical approaches to asset allocation give very different conclusions about how much foreign stocks a US investor should hold. US investors should either allocate a large portion of about 40% to foreign stocks (which is the result of mean/variance optimization and the international CAPM) or they should hold no foreign stocks at all (which is the conclusion of the domestic CAPM and mean/variance spanning tests). There is no way in between.
The idea of the Bayesian approach discussed in this article is to shrink the mean/variance efficient portfolio towards the market portfolio. The shrinkage effect is determined by the investor's prior belief in the efficiency of the market portfolio and by the degree of violation of the CAPM in the sample. Interestingly, this Bayesian approach leads to the same implications for asset allocation as the mean-variance/tracking error criterion. In both cases, the optimal portfolio is a combination of the market portfolio and the mean/variance efficient portfolio with the highest Sharpe ratio.
Applying both approaches to the subject of international diversification, we find that a substantial home bias is only justified when a US investor has a strong belief in the global mean/variance efficiency of the US market portfolio and when he has a high regret aversion of falling behind the US market portfolio. We also find that the current level of home bias can be justified whenever-regret aversion is significantly higher than risk aversion.
Finally, we compare the Bayesian approach of shrinking the mean/variance efficient portfolio towards the market portfolio to another Bayesian approach which shrinks the mean/variance efficient portfolio towards the minimum-variance portfolio. An empirical out-of-sample study shows that both Bayesian approaches lead to a clearly superior performance compared to the classical mean/variance efficient portfolio.
109
As past research suggest, currency exposure risk is a main source of overall risk of international diversified portfolios. Thus, controlling the currency risk is an important instrument for controlling and improving investment performance of international investments. This study examines the effectiveness of controlling the currency risk for international diversified mixed asset portfolios via different hedge tools. Several hedging strategies, using currency forwards and currency options, were evaluated and compared with each other. Therefore, the stock and bond markets of the, United Kingdom, Germany, Japan, Switzerland, and the U.S, in the time period of January 1985 till December 2002, are considered. This is done form the point of view of a German investor. Due to highly skewed return distributions of options, the application of the traditional mean-variance framework for portfolio optimization is doubtful when options are considered. To account for this problem, a mean-LPM model is employed. Currency trends are also taken into account to check for the general dependence of time trends of currency movements and the relative potential gains of risk controlling strategies.
106
This paper is a draft for the chapter German banks and banking structure of the forthcoming book The German financial system . As such, the paper starts out with a description of past and present structural features of the German banking industry. Given the presented empirical evidence it then argues that great care has to be taken when generalising structural trends from one financial system to another. Whilst conventio nal commercial banking is clearly in decline in the US, it is far from clear whether the dominance of banks in the German financial system has been significantly eroded over the last decades. We interpret the immense stability in intermediation ratios and financing patterns of firms between 1970 and 2000 as strong evidence for our view that the way in which and the extent to which German banks fulfil the central functions for the financial system are still consistent with the overall logic of the German financial system. In spite of the current dire business environment for financial intermediaries we do not expect the German financial system and its banking industry as an integral part of this system to converge to the institutional arrangements typical for a market-oriented financial system. This Version: March 25, 2003
108
Past research suggests that international real estate markets show return characteristics and interrelationships with other asset classes, which probably qualify them as an interesting component of national and international asset allocation decisions. However, the special characteristics of real estate assets are quite distinct from that of financial assets, such as stocks and bonds. This is also the case for real estate return distributions. Therefore, the proper integration of real estate markets into asset allocation decisions requires profound understanding of real estate returns' distributional characteristics .
Because of the particular characteristics of real estate, representing real estate markets through reliable a time-series is a complex task. Consequently, reliable real estate indices with a sufficiently long history in major international real estate markets are only scarcely available. Most of the research that has been done on real estate returns was done for the U.K. and U.S., where eligible indices exist. On the other hand, in other important real estate markets, such as Germany, either little or no research has been perfoimed.
In this analysis, the methodology of Maurer, Sebastian and Stephan (2000) for indirectly deriving an appraisal-based index for the German commercial real estate market will be applied. This approach is solely based on publicly available data from German open-ended real estate investment trusts. It could also provide a solution to deriving a reliable real estate time-series for other markets.
We will extend previous analyses for the U.K. and U.S. to provide additional fundamental insights into the return characteristics of the German commercial real estate market. Despite univariate considerations, the main focus is the interrelationships between various international real estate markets, as well as between those respective markets and the international stock and bond markets.
115
Under a new Basel capital accord, bank regulators might use quantitative measures when evaluating the eligibility of internal credit rating systems for the internal ratings based approach. Based on data from Deutsche Bundesbank and using a simulation approach, we find that it is possible to identify strongly inferior rating systems out-of time based on statistics that measure either the quality of ranking borrowers from good to bad, or the quality of individual default probability forecasts. Banks do not significantly improve system quality if they use credit scores instead of ratings, or logistic regression default probability estimates instead of historical data. Banks that are not able to discriminate between high- and low-risk borrowers increase their average capital requirements due to the concavity of the capital requirements function.
121
Asset-backed securitisation (ABS) is an asset funding technique that involves the issuance of structured claims on the cash flow performance of a designated pool of underlying receivables. Efficient risk management and asset allocation in this growing segment of fixed income markets requires both investors and issuers to thoroughly understand the longitudinal properties of spread prices. We present a multi-factor GARCH process in order to model the heteroskedasticity of secondary market spreads for valuation and forecasting purposes. In particular, accounting for the variance of errors is instrumental in deriving more accurate estimators of time-varying forecast confidence intervals. On the basis of CDO, MBS and Pfandbrief transactions as the most important asset classes of off-balance sheet and on-balance sheet securitisation in Europe we find that expected spread changes for these asset classes tends to be level stationary with model estimates indicating asymmetric mean reversion. Furthermore, spread volatility (conditional variance) is found to follow an asymmetric stochastic process contingent on the value of past residuals. This ABS spread behaviour implies negative investor sentiment during cyclical downturns, which is likely to escape stationary approximation the longer this market situation lasts.