Forward Curve Risk Factors Analysis in the UK Real Estate Market

Pierre-Arnaud Drouhin, Yasmine Essafi () and Arnaud Simon
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Pierre-Arnaud Drouhin: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Yasmine Essafi: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Arnaud Simon: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: 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.

Keywords: Real estate swap; Forward curve; Appraisal based index; First-difference model (search for similar items in EconPapers)
Date: 2015
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Published in Journal of Real Estate Finance and Economics, 2015, 53 (4), ⟨10.1007/s11146-015-9534-z⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01438428

DOI: 10.1007/s11146-015-9534-z

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