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Forward Curve Risk Factors Analysis in the UK Real Estate Market

Drouhin, Pierre-Arnaud; Essafi, Yasmine; Simon, Arnaud (2015), Forward Curve Risk Factors Analysis in the UK Real Estate Market, Journal of Real Estate Finance and Economics, 53, 4, p. 494-526. 10.1007/s11146-015-9534-z

Type
Article accepté pour publication ou publié
Date
2015
Journal name
Journal of Real Estate Finance and Economics
Volume
53
Number
4
Publisher
Springer
Pages
494-526
Publication identifier
10.1007/s11146-015-9534-z
Metadata
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Author(s)
Drouhin, Pierre-Arnaud
Dauphine Recherches en Management [DRM]
Essafi, Yasmine
Dauphine Recherches en Management [DRM]
Simon, Arnaud
Dauphine Recherches en Management [DRM]
Abstract (EN)
This paper empirically investigates the risk factors of the property swap prices using 4 years of price data relative to the UK Investment Property Databank (IPD) Total Return All Property Swap. The implied forward rates are analyzed with a first difference model to determine its main components. Regarding the risk free rate, the traditional sport-forward relation does not hold for property derivatives. The impact of the risk free rate on forward rates appears as being complex and made of different effects; it varies according to time and maturities. Derivatives prices take into account the smoothing effect of the underlying index and REITs stocks are also relevant to explain these prices. The informational content of the swap is important. The impact of the REITs and of the smoothing decreases with maturities. The risk factor structure obtained is more complex than found in many other studies relative to commodities, securities or bonds. Possible reasons for this phenomenon are discussed.
Subjects / Keywords
Real estate swap; Forward curve; Appraisal based index; First-difference model
JEL
R31 - Housing Supply and Markets

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