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Re-examining the modelling of yields in a volatile market  by Ben Burston

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: ben.burston@dtz.com Kostis Papadopoulos DTZ, 125 Old Broad Street, London, EC2N 2BQ

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Re-examining the modelling of yields in a volatile market  by Ben Burston

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  1. 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: ben.burston@dtz.com • Kostis Papadopoulos • DTZ, 125 Old Broad Street, London, EC2N 2BQ • Tel: +44 (0)20 3296 2329 Email: kostis.papadopoulos@dtz.com • & • Tony McGough • DTZ, 125 Old Broad Street, London, EC2N 2BQ • Tel: +44 (0)20 3296 2314 Email: tony.mcgough@dtz.com • 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.

  2. Introduction • Methodology • Model • Impact of global volatility • Implications of modelling output

  3. Introduction Methodology • 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

  4. Issue of pricing of risk

  5. Yield history and financial pricing within markets Source :DTZ Research

  6. Testing for a breakpoint in 2003 Source :DTZ Research

  7. Data used • Variables RR = real rents Bond = 10 year government bond Divy = Dividend Yield Trvn = transaction volume numbers RMoney = Real money supply • Time Series Quarterly 1997 2009 • London Office rents

  8. Yield equation to 2003 - bonds Source :DTZ Research

  9. Yield equation to 2003 - bonds Source :DTZ Research

  10. Yield equation to 2003 – dividend yields Source :DTZ Research

  11. Full model to 2009 Q4 - bonds Source :DTZ Research

  12. Full model to 2009 Q4 – dividend yields Source :DTZ Research

  13. 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 Source :DTZ Research

  14. Full model to 2009 Q4 – solutions • Need to incorporate other variables into this analysis • In particular risk measures and time varying premia Source :DTZ Research

  15. Risk pricing from near zero to 400 bps

  16. Full model to 2009 Q4 Source :DTZ Research

  17. Full model to 2009 Q4 Source :DTZ Research

  18. Conclusions London (City) • 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 London (West End) Madrid Paris Sydney Frankfurt New York Shanghai Tokyo Source: DTZ Research

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