Mexican REITs (FIBRAS) in retirement funds (AFORES): different pricing approaches and market risk measurement implications

Abstract

This paper compares different pricing approaches for REITs and how they affect market risk measurement. Our study reveals that the Value at Risk valuation method used for REITs changes dramatically. This is an important issue for Mexican retirement funds. Our first valuation approach assumes that the REIT is a structured instrument consisting of a risky bond and an attached option on the value of a Mexican construction firm. The second alternative uses current data from FIBRA UNO (the largest Mexican REIT) as an uncertainty source. The third approach is developed by using an implicit net asset value (NAV) for FIBRA UNO, obtained as an indirect result of Merton's (1974) credit risk model. The fourth and last approach assumes that the REITs' market prices behave like small-caps with relatively low betas as stated in the literature. In all cases, the REITs are attached to a retirement fund portfolio subject to the Mexican regulation framework. Finally, we find empirical evidence of a high kurtosis on all the stylised portfolios, and that a high risk is assumed by retirement fund portfolios, despite their risk level should be associated with the age group of the affiliated workers.