Hedging Effectiveness of Total Returns Swaps: Application to the Japanese Market

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Hedging Effectiveness of Total Returns Swaps: Application to the Japanese Market

Author Info

Yoshiki Kago
Charles Ward () (Department of Real Estate & Planning, University of Reading)

Abstract

The development of the real estate swap market offers many opportunities for investors to adjust the exposure of their portfolios to real estate. A number of OTC transactions have been observed in markets around the world. In this paper we examine the Japanese commercial real estate market from the point of view of an investor holding a portfolio of properties seeking to reduce the portfolio exposure to the real estate market by swapping an index of real estate for LIBOR. This paper explores the practicalities of hedging portfolios comprising small numbers of individual properties against an appropriate index. We use the returns from 74 properties owned by Japanese Real Estate Investment Trusts over the period up to September 2007. The paper also discusses and applies the appropriate stochastic processes required to model real estate returns in this application and presents alternative ways of reporting hedging effectiveness. We find that the development of the derivative does provide the capacity for hedging market risk but that the effectiveness of the hedge varies considerably over time. We explore the factors that cause this variability.

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Paper provided by Henley Business School, Reading University in its series Real Estate & Planning Working Papers with number rep-wp2008-05.

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Length: 44 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:rdg:repxwp:rep-wp2008-05

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Englund, Peter & Hwang, Min & Quigley, John M, 2002. "Hedging Housing Risk," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 167-200, Jan.-Marc. [Downloadable!] (restricted)
Other versions:
- Peter ENGLUND & Min HWANG & John M. QUIGLEY, 2000. "Hedging Housing Risk," FAME Research Paper Series rp26, International Center for Financial Asset Management and Engineering. [Downloadable!]
- Peter Englund & Min Hwang & John Quigley, 2006. "Hedging Housing Risk," Berkeley Program on Housing and Urban Policy, Working Paper Series 1018, Berkeley Program on Housing and Urban Policy. [Downloadable!]
- Englund, Peter & Hwang, Min & Quigley, John M., 2001. "Hedging Housing Risk," SIFR Research Report Series 2, Institute for Financial Research. [Downloadable!]
Lawrence Benveniste & Dennis R. Capozza & Paul J. Seguin, 2001. "The Value of Liquidity," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(4), pages 633-660. [Downloadable!] (restricted)
Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun. [Downloadable!] (restricted)
Kanak Patel & Ricardo Pereira, 2008. "Pricing Property Index Linked Swaps with Counterparty Default Risk," The Journal of Real Estate Finance and Economics, Springer, vol. 36(1), pages 5-21, January. [Downloadable!] (restricted)
Howard, Charles T. & D'Antonio, Louis J., 1984. "A Risk-Return Measure of Hedging Effectiveness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(01), pages 101-112, March. [Downloadable!]
David Collett & Colin Lizieri & Charles Ward, 2003. "Timing and the Holding Periods of Institutional Real Estate," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(2), pages 205-222, 06. [Downloadable!] (restricted)
Park, Tae H & Switzer, Lorne N, 1995. "Risk Management of Real Estate: The Case of Real Estate Swaps," The Journal of Real Estate Finance and Economics, Springer, vol. 11(3), pages 219-33, November.

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