re-examining the modelling of yields in a volatile market by ben burston
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Re-examining the modelling of yields in a volatile market by Ben Burston DTZ, 125 Old Broad Street, London, EC2N 2BQ Tel: +44 (0)20 3296 3011 Email: [email protected] Kostis Papadopoulos DTZ, 125 Old Broad Street, London, EC2N 2BQ - PowerPoint PPT PresentationTRANSCRIPT
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Re-examining the modelling of yields in a volatile market by
Ben BurstonDTZ, 125 Old Broad Street, London, EC2N 2BQ
Tel: +44 (0)20 3296 3011 Email: [email protected]
Kostis PapadopoulosDTZ, 125 Old Broad Street, London, EC2N 2BQ
Tel: +44 (0)20 3296 2329 Email: [email protected]
& Tony McGough
DTZ, 125 Old Broad Street, London, EC2N 2BQTel: +44 (0)20 3296 2314 Email: [email protected]
Paper presented at the 17th European real Estate Society Conference,Milan, Italy – June 23rd 26th 2010.Draft paper: Not to be quoted without permission from the authors.
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Introduction
• Methodology
• Model
• Impact of global volatility
• Implications of modelling output
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Introduction
• Previous model (Hicks & McGough 2005) provided a framework for our yield analysis
• Previous equation looks at impact of• Rental expectations• Bond prices• Fixed risk premia via constant
• Present model• Incorporates transaction volumes• Money supply
Methodology
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Issue of pricing of risk
Page 5
Yield history and financial pricing within markets
Source :DTZ Research
Page 6Source :DTZ Research
Testing for a breakpoint in 2003
Chow Breakpoint Test: 2003Q4
Null Hypothesis: No breaks at specified breakpoints
Varying regressors: All equation variables
Equation Sample: 1997Q3 2009Q4
F-statistic 7.546258 Prob. F(5,40) 0.0000
Log likelihood ratio 33.21892 Prob. Chi-Square(5) 0.0000
Wald Statistic 37.73129 Prob. Chi-Square(5) 0.0000
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Data used
• Variables
RR = real rentsBond = 10 year government bondDivy = Dividend YieldTrvn = transaction volume numbersRMoney = Real money supply
• Time Series Quarterly 1997 2009• London Office rents
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Yield equation to 2003 - bonds
Source :DTZ Research
No autocorrelation, no heteroscedasticity
Page 9Source :DTZ Research
Yield equation to 2003 - bonds
Page 10Source :DTZ Research
No autocorrelation, no heteroscedasticity
Yield equation to 2003 – dividend yields
Page 11Source :DTZ Research
Full model to 2009 Q4 - bonds
Page 12Source :DTZ Research
Full model to 2009 Q4 – dividend yields
Page 13Source :DTZ Research
Full model to 2009 Q4 – key findings
Changes in relationships
•Bond relationship turns negative •Dividend yield relationship insignificant•Serial correlation appears
Why?
•Chasing the yield•Outward movement of yields following financial crisis
Page 14Source :DTZ Research
Full model to 2009 Q4 – solutions
Need to incorporate other variables into this analysis
•In particular risk measures and time varying premia
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Risk pricing from near zero to 400 bps
0%
1%
2%
3%
4%
5%
Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09
A AA AAA BBB
UK corporate benchmarks - 10 year yield spread over 10 year gilts
Source: DTZ Research, EcoWin
Page 16Source :DTZ Research
Full model to 2009 Q4
Page 17Source :DTZ Research
Full model to 2009 Q4
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Conclusions
Source: DTZ Research
London (City)
London (West End)MadridParis
Sydney
FrankfurtNew YorkShanghai
Tokyo
•Structural break found in yield relationships using old methodology
•Previous relationships have changed in the current environment
•More sophisticated modelling of risk needed to take into account more volatile risk markets