IDEAS home Printed from https://ideas.repec.org/p/arz/wpaper/eres2008_169.html
   My bibliography  Save this paper

Hedging Effectiveness Of Total Returns Swaps: Application To The Japanese Market

Author

Listed:
  • Yoshiki Kago
  • Charles W.R. Ward

Abstract

The purpose of this paper is to explore the hedging effectiveness of total returns swaps (TRS) in real estate investment. We assume that investors own a real estate portfolio and wish to reduce their exposure to future movements in the property market. They therefore will swap the real estate index for LIBOR plus spread. We first model the cash flow of the resultant portfolio and then analyze the hedging effectiveness both in ex ante terms and with actual returns using a sample, provided by the Association for Real Estate Securitization in Japan, of 74 office properties in the Tokyo metropolitan area over a four year period. The samples of real estate portfolios are constructed randomly and the portfolios range in size from single properties to portfolios of up to 10 properties. The investment horizon varies from 6 months to 24 months. On the basis of this study we conclude that, with a small or zero spread in the total return swap market, investors can s tabilize the return of their portfolios. The ex ante hedging effectiveness, that is, the ratio of the standard deviation of the portfolio returns with and without the hedge in place, ranges from 0.71 to 0.14 and is usually greater than the actual hedging effectiveness which varies from 0.68 to 0.36. However if the spread is non-zero (based on the expected returns), the hedging effectiveness is substantially reduced, because the effect of the spread increases the uncertainty of the hedge portfolio.

Suggested Citation

  • Yoshiki Kago & Charles W.R. Ward, 2008. "Hedging Effectiveness Of Total Returns Swaps: Application To The Japanese Market," ERES eres2008_169, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2008_169
    as

    Download full text from publisher

    File URL: https://eres.architexturez.net/doc/oai-eres-id-eres2008-169
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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(1), pages 101-112, March.
    2. Cecchetti, Stephen G & Cumby, Robert E & Figlewski, Stephen, 1988. "Estimation of the Optimal Futures Hedge," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 623-630, November.
    3. 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.
    4. 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, April.
    5. 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 109-124, April-Jun.
    6. Amihud, Yakov & Mendelson, Haim, 1989. " The Effects of Beta, Bid-Ask Spread, Residual Risk, and Size on Stock Returns," Journal of Finance, American Finance Association, vol. 44(2), pages 479-486, June.
    7. Björk, Tomas & Clapham, Eric, 2002. "A Note on the Pricing of Real Estate Index Linked Swaps," SSE/EFI Working Paper Series in Economics and Finance 492, Stockholm School of Economics.
    8. Shaun Bond & Soosung Hwang & Zhenguo Lin & Kerry Vandell, 2007. "Marketing Period Risk in a Portfolio Context: Theory and Empirical Estimates from the UK Commercial Real Estate Market," The Journal of Real Estate Finance and Economics, Springer, vol. 34(4), pages 447-461, May.
    9. Philippe Boveroux & Albert Minguet, 1999. "Selecting hedge ratio maximizing utility or adjusting portfolio's beta," Applied Financial Economics, Taylor & Francis Journals, vol. 9(5), pages 423-432.
    10. 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.
    11. Shiller, Robert J & Weiss, Allan N, 1999. "Home Equity Insurance," The Journal of Real Estate Finance and Economics, Springer, vol. 19(1), pages 21-47, July.
    12. Richard D. F. Harris & Jian Shen & Evarist Stoja, 2010. "The Limits to Minimum‐Variance Hedging," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5‐6), pages 737-761, June.
    13. 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, June.
    14. Juerg Syz & Paolo Vanini & Marco Salvi, 2008. "Property Derivatives and Index-Linked Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 36(1), pages 23-35, January.
    15. 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 219-233, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frank J. Fabozzi & Robert J. Shiller & Radu S. Tunaru, 2010. "Property Derivatives for Managing European Real†Estate Risk," European Financial Management, European Financial Management Association, vol. 16(1), pages 8-26, January.
    2. Frank Fabozzi & Robert Shiller & Radu Tunaru, 2009. "Property Derivatives for Managing European Real-Estate Risk," Yale School of Management Working Papers amz2652, Yale School of Management, revised 01 Sep 2009.
    3. Ming Pu & Gang-Zhi Fan & Seow Ong, 2012. "Heterogeneous Agents and the Indifference Pricing of Property Index Linked Swaps," The Journal of Real Estate Finance and Economics, Springer, vol. 44(4), pages 543-569, May.
    4. Mao-wei Hung & Cheng-few Lee & Leh-chyan So, 2005. "Hedging with Foreign-Listed Single Stock Futures," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting New Series, chapter 8, pages 129-151, World Scientific Publishing Co. Pte. Ltd..
    5. Shashi Gupta & Himanshu Choudhary & D.R. Agarwal, 2017. "Hedging Efficiency of Indian Commodity Futures," Paradigm, , vol. 21(1), pages 1-20, June.
    6. Chen, Sheng-Syan & Lee, Cheng-few & Shrestha, Keshab, 2003. "Futures hedge ratios: a review," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 433-465.
    7. Dungey, Mardi & Henry, Olan T & Hvodzdyk, Lyudmyla, 2013. "The impact of jumps and thin trading on realized hedge ratios," Working Papers 2013-02, University of Tasmania, Tasmanian School of Business and Economics, revised 28 Mar 2013.
    8. Frank J. Fabozzi & Robert J. Shiller & Radu S. Tunaru, 2012. "A Pricing Framework for Real Estate Derivatives," European Financial Management, European Financial Management Association, vol. 18(5), pages 762-789, November.
    9. Christos Floros & Dimitrios Vougas, 2004. "Hedge ratios in Greek stock index futures market," Applied Financial Economics, Taylor & Francis Journals, vol. 14(15), pages 1125-1136.
    10. Vicente Meneu & Hipòlit Torró, 2003. "Asymmetric covariance in spot‐futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(11), pages 1019-1046, November.
    11. Fabrice Barthélémy & Jean-Luc Prigent, 2009. "Optimal Time to Sell in Real Estate Portfolio Management," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 59-87, January.
    12. Juerg Syz & Paolo Vanini & Marco Salvi, 2008. "Property Derivatives and Index-Linked Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 36(1), pages 23-35, January.
    13. Thomas Paul & Thomas Walther & André Küster-Simic, 2022. "Empirical analysis of the illiquidity premia of German real estate securities," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(2), pages 203-260, June.
    14. Stavros Degiannakis & Christos Floros & Enrique Salvador & Dimitrios Vougas, 2022. "On the stationarity of futures hedge ratios," Operational Research, Springer, vol. 22(3), pages 2281-2303, July.
    15. Choudhry, Taufiq, 2009. "Short-run deviations and time-varying hedge ratios: Evidence from agricultural futures markets," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 58-65, March.
    16. Michael S. Haigh & Matthew T. Holt, 2002. "Combining time-varying and dynamic multi-period optimal hedging models," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 29(4), pages 471-500, December.
    17. Martínez, Beatriz & Torró, Hipòlit, 2015. "European natural gas seasonal effects on futures hedging," Energy Economics, Elsevier, vol. 50(C), pages 154-168.
    18. Emmanuel Hache & Anthony Paris, 2018. "Market Efficiency and Optimal Hedging Strategy for the US Ethanol Market," EconomiX Working Papers 2018-6, University of Paris Nanterre, EconomiX.
    19. Bessler, Wolfgang & Leonhardt, Alexander & Wolff, Dominik, 2016. "Analyzing hedging strategies for fixed income portfolios: A Bayesian approach for model selection," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 239-256.
    20. Viviana Fernandez, 2008. "Multi‐period hedge ratios for a multi‐asset portfolio when accounting for returns co‐movement," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(2), pages 182-207, February.

    More about this item

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arz:wpaper:eres2008_169. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Architexturez Imprints (email available below). General contact details of provider: https://edirc.repec.org/data/eressea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.