The Relevance Of Real Estate Assets And Derivatives For International Money Markets And Their Preeminent Role During The Subprime Financial Crises

During the recent financial crises the relevance of the real estate sector for the stability of capital markets was clearly demonstrated. First, real estate assets have been the underlying for various derivative products, e.g. Mortgage Backed Securities, which enabled mortgage lenders to divide risks between investors while these could diversify portfolios or speculate on price movements of the fundamental asset. Second, the role of real estate assets and related derivative structures became increasingly important as collateral in money market transactions such as repos. Consequently, a large portion of the liquidity provided in money markets was directly dependent on the price development in the real estate sector. Hence, international regulatory authorities and policy makers as well as financial market participants need a better understanding of how these markets affect each other. Thus, in the following we will particularly analyse how different types of real estate assets and related derivatives influence the functioning of international money markets. Moreover, it will be examined wether such assets primarily drive liquidity or counterparty risk in these markets as soon as it comes to economic or financial crises. Therefore, the correlations between the continuous yields in various international real estate and money markets will be modelled by following a multivariate DCC-GARCH approach. This methodology will allow for accounting for the characteristics of time variant correlations, the common cause interdependence as well as possible structural changes in the inter-market correlations over time.