Real Asset Market Research Articles

Novel COVID-19 Outbreak and Global Uncertainty in the Top-10 Affected Countries: Evidence from Wavelet Coherence Approach

This study explores the association of novel COVID-19 with the dominant financial assets, global uncertainty, commodity prices, and stock markets of the top ten corona-affected countries. We employ a wavelet coherence technique to unearth this linkage using daily data of COVID-19 deaths and reported cases from 1 January 2020 until 26 February 2021. The study finds a weak coherence between COVID-19 and global uncertainty variables in the short and medium term, while a strong positive correlation has been witnessed in the long run. The COVID-19 cases impact the stock markets in the short and medium term, while no significant impact is reported in the long run. On the other hand, a substantial impact of the COVID-19 outbreak has also been found on the exchange rate. In addition, the real asset market, such as gold, remains more stable during the COVID-19 outbreak. Thus, the study recommends that investors and portfolio managers should add such assets to their investment options to safeguard the excessive risk and downside momentum of the equity market. The study also has implications for regulators who are concerned with the neutrality of the COVID-19 effect and market stability.

Buy Together, but Recycle Alone: Sentiment-Driven Herding Behavior in Oceanic Dry Bulk Shipping

We employ the vessels that comprise the dry bulk segment of the maritime industry and examine how market sentiment affects the herding behavior of shipping investors in a real asset market. Our results show that the behavioral aspect of investing, measured through intentional and unintentional herding, contrary to the results for financial markets, is affected by sentiment on the buy side (newbuildings) but not on the sell side (scrapping). Furthermore, we provide evidence that when market sentiment is negative, investors tend to follow market leaders (intentional herding), while, when sentiment is positive, unintentional herding leads to common investment practices among shipping investors. Our results have significant implications both for academics and for practitioners since they reflect a clear distinction of the pattern of investment decisions for real assets, compared to financial assets.

An optimistic value–variance–entropy model of uncertain portfolio optimization problem under different risk preferences

For the traditional portfolio optimization problems, the return rates of risky assets are described by random variables or fuzzy variables. Due to the complexity of real asset market, this assumption may not always be satisfactory, for example, when there are not enough available data. Hence, return rates can be treated as uncertain variables in many cases. In this paper, we consider an uncertain portfolio optimization problem under different risk preferences. First, an optimistic value–variance–entropy model is formulated, where optimistic value and entropy are used for measuring investment return and diversification, respectively. Then, a three-step method is proposed for solving the formulated model with considering different risk preferences. Finally, a comparison is presented in numerical simulation for illustrating the practicality and effectiveness of our models and solution method.

Cheap TIPS or Expensive Inflation Swaps?: Mispricing in Real Asset Markets

Inflation risks are explicit in either (i) the nominal pricing of real payoffs in which prices are denominated in dollars, or (ii) the real pricing of nominal payoffs in which prices are denominated in consumption baskets. While the former involves over-the-counter inflation-indexed contracts of real asset market, the latter involves exchange-traded and highly liquid contracts of nominal asset market. We employ a parametric pricing model to investigate the asymmetry between these two markets. The model obtains a liquidity-free distribution of future inflation using new price data of T-note futures in nominal asset market, and implies liquidity risk premia separately for any traded contract in real asset market. These premia indicate both an underpricing for TIPS and an overpricing for inflation swaps, whose significances increase with the tenor of these assets. Such a mispricing in inflation swaps help temper a severe implied mispricing of TIPS needed to match the puzzling trade profit on the nominal-TIPS yield spread. While yields on TIPS still command a liquidity component, this finding implicates less pronounced borrowing costs to the U.S. government in issuing TIPS.

The Real Estate Market in the Aftermath of September 11

This study examines the reaction of the financial markets to the terrorist attack on the World Trade Center and how their behavior compared to the subsequent resolution in the corresponding real asset markets. This event provides an ideal setting to evaluate the accuracy of the market's reaction to external shocks since, unlike almost all studies of economic events, this tragedy was certainly unanticipated and thus absent from pre-existing market expectations, its overall impact was unclear, and the subsequent week of market closure gave market participants sufficient time to sort out the complex impact of the event on market prices. Our analysis of Real Estate Investment Trusts (REITs) with New York office exposure outside of the downtown area shows that, during the period of market closure and the first trading day, the equity market did not accurately anticipate how this event would impact office REITs. Specifically, we find that REITs with significant exposure to the New York market showed significant gains relative to REITs without New York exposure (an average difference of 4.057% of market value from the close on September 10 to the opening on September 17), and that this abnormal return disappeared only in November 2001. However, an examination of the underlying real asset market's performance over the first few months after September 11 shows that New York properties significantly under-performed similar office properties in the U.S. This evidence provides little support for the notion that financial markets can rapidly and correctly price significant shocks to the underlying economy.

STABILITY ANALYSIS WITH APPLICATIONS OF A TWO-DIMENSIONAL DYNAMICAL SYSTEM ARISING FROM A STOCHASTIC MODEL FOR AN ASSET MARKET

We analyze the stability properties of equilibrium solutions and periodicity of orbits in a two-dimensional dynamical system whose orbits mimic the evolution of the price of an asset and the excess demand for that asset. The construction of the system is grounded upon a heterogeneous interacting agent model for a single risky asset market. An advantage of this construction procedure is that the resulting dynamical system becomes a macroscopic market model which mirrors the market quantities and qualities that would typically be taken into account solely at the microscopic level of modeling. The system's parameters correspond to: (a) the proportion of speculators in a market; (b) the traders' speculative trend; (c) the degree of heterogeneity of idiosyncratic evaluations of the market agents with respect to the asset's fundamental value; and (d) the strength of the feedback of the population excess demand on the asset price update increment. This correspondence allows us to employ our results in order to infer plausible causes for the emergence of price and demand fluctuations in a real asset market. The employment of dynamical systems for studying evolution of stochastic models of socio-economic phenomena is quite usual in the area of heterogeneous interacting agent models. However, in the vast majority of the cases present in the literature, these dynamical systems are one-dimensional. Our work is among the few in the area that construct and study analytically a two-dimensional dynamical system and apply it for explanation of socio-economic phenomena.

The Role of Trading Frictions in Real Asset Markets

This paper investigates how trading frictions vary with the thickness of the asset market by examining patterns of asset allocations and prices in commercial aircraft markets. The empirical analysis indicates that assets with a thinner market are less liquid—i.e., more difficult to sell. Thus, firms hold on longer to them amid profitability shocks. Hence, when markets for assets are thin, firms' average productivity and capacity utilization are lower, and the dispersions of productivity and of capacity utilization are higher. In turn, prices of assets with a thin market are lower and have a higher dispersion. (JEL A12, L11, L93)

Real Assets, Liquidation Value and Choice of Financing

We use real estate firms to examine how asset liquidation values influence a firm’s financing choices, since the productivity and quality of each asset is observable and potential measures of an asset’s liquidation value are easier to ascertain ex-ante. We show that compared to firms that issue equity, firms that issue debt have higher asset quality. The effect of their expected asset liquidation value is significant, even after we control for other factors that influence financing decisions. For firms whose assets’ quality is not easily observable, we find that firms’ financing choices depend heavily on conditions in the overall real asset market.

The Completion of Real‐Asset Markets by Options

We combine the theory of finite‐dimensional lattice subspaces and the theory of regular values for maps between smooth manifolds in order to study the completion of real asset markets by options. The strike asset of the options is supposed to be a nominal asset. The main result of the paper is like in the case of the completion of a nominal asset market by options that if the strike asset of the options is the riskless asset, then the completion of a real asset market is generically equal to ℝS.

Excess demand functions when new assets are introduced

We demonstrate that information on the aggregate excess demand function of an incomplete real asset market economy is not helpful toward predicting the equilibrium of a new economy to which unredundant assets are added. An innovation of assets can completely change the aggregate excess demand functions.

Money Illusion and Nominal Inertia in Experimental Asset Markets

We test whether large but purely nominal shocks affect real asset market prices. We subject a laboratory asset market to an exogenous shock, which either inflates or deflates the nominal fundamental value of the asset, while holding the real fundamental value constant. After an inflationary shock, nominal prices adjust upward rapidly and we observe no real effects. However, after a deflationary shock, nominal prices display considerable inertia and real prices adjust only slowly and incompletely toward the levels that would prevail in the absence of a shock. Thus, an asymmetry is observed in the price response to inflationary and deflationary nominal shocks.

Money Illusion and Nominal Inertia in Experimental Asset Markets

We test whether large but purely nominal shocks affect real asset market prices. We subject a laboratory asset market to an exogenous shock, which either inflates or deflates the nominal fundamental value of the asset while holding the real fundamental value constant. After an inflationary shock, nominal prices adjust upward rapidly, and we observe no real effects. However, after a deflationary shock, nominal prices display considerable inertia and real prices adjust only slowly and incompletely toward the levels that would prevail in the absence of a shock. Thus, an asymmetry is observed in the price response to inflationary and deflationary nominal shocks.

The Role of Trading Frictions in Real Asset Markets

Almost all real assets trade in decentralized markets, where trading frictions could inhibit the efficiency of asset allocations and depress asset prices. In this paper, I use data on commercial aircraft markets to empirically investigate whether trading frictions vary with the size of the asset market. Intuitively, it is more difficult to sell assets that have a thin market. As a result, firms find it optimal to hold on longer to assets with a thinner market in case their profitability rises in the future. Thus, when markets for firms' assets are thin, firms' average productivity and capacity utilization are lower, and the dispersions of productivity and of capacity utilization are higher. In turn, prices of assets with a thin market are, on average, lower and have a higher dispersion, since prices depend on firms' productivity and capacity utilization.The empirical analysis confirms that trading frictions vary with the size of the market, as aircraft with a thinner market have: 1) lower turnover; 2) lower capacity utilization; 3) higher dispersion of utilization levels; 4) lower mean prices; and 5) higher dispersion of transaction prices.

The Role of the Underlying Real Asset Market in REIT IPOs

A leading explanation for IPO cycles is time-varying supply and demand for the underlying assets of the firms that are considering going public. We test this hypothesis using REIT IPOs, taking advantage of the relative transparency of the underlying real asset markets. We document links between REIT IPO activity and both the conditions of the underlying real estate market and the price of REITs. We find no significant relation between the heat of the IPO market and post-IPO operating performance, implying homogeneous firm quality across IPO cycles. Finally, we show that lagged IPO proceeds are related to future increases in investment and in capacity utilization.

The Role of the Underlying Real Asset Market in REIT IPOs

One of the leading explanations for cycles in initial public offerings (IPOs) is time-varying supply and demand for the underlying assets of the firms that are considering going public. We test this explanation by examining REIT IPOs over the 1980 to 1998 period. REITs provide a powerful test of this hypothesis due to their homogeneity, transparency, and the relative ease with which investors can observe the state of the underlying real asset markets. Using both supply- and demand-based definitions of hot and cold IPO markets, we show evidence of the link between IPO activity and: (i) the supply and demand for real estate, (ii) the price of REITs relative to their dividends, and (iii) the price of REITs relative to their underlying net asset values. Further, we find no significant difference in post-IPO operating performance for REITs that go public in hot versus cold markets, implying homogeneous firm quality across IPO cycles. Taken together, these tests provide evidence that the supply and demand for real estate capital and the relative price of REITs drive cycles in REIT IPOs.

The Value Added from Investment Managers: An Examination of Funds of REITs

This paper empirically analyzes REIT mutual funds. We show that, contrary to most mu? tual fund studies, the average and median alphas (net of expenses) are positive. We also find that time-varying positive alphas are much more likely to occur when the real asset market is performing poorly, suggesting that managers add more value in down markets than in up markets. We examine the cross-sectional determinants of both standard alphas and the average of time-varying alphas and find that both increase with assets and turnover. Cross-sectionally, we find that actively managed funds have higher alphas than passively managed funds.