Martingale property in bond futures return including volatility spillover effect from bank bill futures

This paper analyses the time series properties of the daily return from the ten-year bond futures contracts traded on the Sydney Futures Exchange (SFE), together with the transmission of volatility from other interest rate futures contracts. The methodology relies on appropriate modelling of the conditional heteroscedasticity observed in the futures price change series. It is then evident that the volatility spillover effect exists from the short-term bank bill futures to the ten-year bond futures and not the other way. This suggests that the traders attempt to make inferences from price movements in other interest rate futures contracts which ultimately impinge upon the price movement in the bond futures contracts. It is indicative of the expectation theory of the term structure.The author is Lecturer in Finance in the School of Finance and Economics, University of Technology, Sydney.     

Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence From The Banking Industry

This study examines the price effects of recent US bank mergers that substantially increased local market concentration. Using the deposit interest rates that banks offer their customers as our price measure, we find that, over the 1991–94 time period, deposit rates offered by participants in substantial horizontal mergers and their local market rivals declined by a greater percentage than did deposit rates offered by banks not operating in markets in which such mergers took place. We interpret our results as evidence that these mergers led to increased market power.     

An Arbitrage-Free Estimate of Prepayment Option Prices in Fixed-Rate GNMA Mortgage-Backed Securities

In an efficient market, the no-arbitrage condition implies that the price difference between any two assets must be the market value of all differences in their cash flows. We use this logic to deduce the price of the prepayment option embedded in fixed-rate Government National Mortgage Association (GNMA) mortgage-backed securities. The option price equals the difference between an observed GNMA price and the cost of a synthetic, nonprepayable GNMA constructed from the least expensive portfolio of Treasury securities that exactly replicates the promised GNMA cash flow stream, assuming prepayment is precluded. We regress the option prices on variables found significant in previous prepayment studies, finding that five key regressors explain more than 90% of the prepayment option value in pooled time-series cross-sectional analysis. We also show that the time value of the prepayment option calculated by our method displays a pattern similar to that produced by the Black-Scholes (1973) option pricing model. An additional empirical result is the existence of negative option prices and negative time value of the option prices. We attribute these to the fact that homeowners sometimes exercise their prepayment options when they are out-of-the-money, and to refinancing transaction costs. Our method is independent of assumptions regarding interest rate processes and the homeowner's prepayment behavior, and it provides a benchmark for testing theoretical prepayment models.     

Momentum and House Price Growth in the United States: Anatomy of a Bubble

This article analyzes the bubble in property values across cities in the United States from 1999 through 2005. We find evidence of momentum in house price growth (relative to growth in rents) away from the underlying fundamentals throughout the 1980–2005 period; however, momentum increased after 1999. We find that the bubble happened mostly after 2003; it was for a relatively short period and was characterized by a series of positive, seemingly random, shocks that were associated with the surge in the subprime market and the decline in short‐term interest rates. Before that price changes were reasonably well explained by the fundamentals, particularly the decline in long‐term interest rates in the early part of the bubble period. We do not find evidence of a tendency for prices relative to rents to revert to a long‐run trend.     

Estimating the Lagging Error in Real Estate Price Indices

Real estate indices based on appraisals or sale prices of properties are known for their slow response to market news. These indices can therefore be represented (in logarithm) as the sum of a latent "true" price index and a lagging error. We show that the latent appreciation return and the lagging error can be jointly estimated in a state–space model, which has two key features. First, it employs exogenous variables known to predict asset returns to predict the latent appreciation return. Second, it incorporates known sources of the lagging error, such as the partial adjustment in observed index to the latent appreciation return and the seasonality in reappraisal quality. We find that, after the estimated lagging errors are removed, the appraisal–based National Council of Real Estate Investment Fiduciaries returns become more informative and hence exhibit (i) greater variance, (ii) weaker auto correlation, (iii) higher correlation with the returns of the securitized real estate and (iv) more timely response to market news.     

The Measurement and Determinants of Single-Family House Prices

We assess the conceptual and empirical features of a number of house price series for the United States. We then calculate a measure of the net up-grading of the existing stock of houses that took place during the 1950–1989 period and adjust price indexes for this net increase in quality. Judgments about the trend, volatility, and determinants of house prices are shown to depend crucially on which price series is used. The Freddie Mac upgrade-adjusted house price measure rose 5.7% over the past four decades, falling 7.7% from 1950 through 1970 before rising 14.5% from 1970 through 1989. Real house prices declined in the early 1980s due to the increase in real after-tax interest rates and the decline in real materials costs. The recovery of house prices in the late 1980s is attributed to lower unemployment and real after-tax interest rates and particularly to demographic factors associated with the aging of baby boomers.     

FNMA Mortgage Purchase Commitments As Put Options: An Empirical Examination

The Federal National Mortgage Association (FNMA) auctions commitments to purchase mortgages. An examination of the terms of the commitment contract shows that these commitments are actually put options on mortgages. The contract is unusual, however, in that the price of the commitment is a fixed percentage of the value of the mortgages. In the auction, the dealers effectively bid the exercise price at which they would be willing to pay the fixed commitment price.
In this paper, we study the economics of the FNMA auction. We use a two-state approximation to the American put pricing model for interest-dependent securities to examine the behavior of the auction results. We find that the model performs reasonably well for several years — giving results which are, on the average, correct — and then, quite abruptly, the performance of the model deteriorates. Some possible reasons for this result are then examined.     

Underpricing of initial public offerings in Singapore: A discriminating test of the information-signalling hypotheses

This study provides a discriminating test of two signalling models which explain the underpricing of initial public offerings. The empirical results suggest a one-signal equilibrium which is consistent with Leland and Pyle's model, but which rejects Grinblatt and Hwang's two-signal model. The fraction of equity that the issuer retains in the firm which goes public dominates the offering price as a signal for firm quality. A higher equity fraction indicates better firm quality and therefore a lowerex ante uncertainty over firm value. Investors should then expect a smaller initial return on the offering.The author thanks Warren Bailey for his useful comments and suggestions in the earlier draft. The author is also grateful for the financial assistance from the research grant programme at the National University of Singapore.     

建设项目价差预备费参考基准价格指数的选取及其适用性研究

价差预备费需要根据价格指数进行计算,近年来国家层面未对价格指数进行更新发布,使造价人员在实际工作中存在如何取定的困惑。如通过预测的方法来取定,则面临如何选择合适的参考基准价格指数的问题。文章在国内庞杂的价格指数中筛选出国内生产总值平减指数(GDP平减指数)、居民消费价格指数(CPI)、商品零售价格指数、固定资产投资价格指数、工业生产者出厂价格指数、工业生产者购进价格指数进行分析和研究,通过内涵分析和数理分析的方法研究发现固定资产投资价格指数、国内生产总值平减指数(GDP平减指数)更适合作为预测价差预备费的参考基准价格指数,以期为同行在价差预备费计算方面提供有益的借鉴。     

Household Interest Rate Risk Management

I investigate household interest rate risk management by solving a life‐cycle asset allocation model that includes mortgage and bond portfolio choice. I find that most investors prefer an adjustable‐rate mortgage and thereby save on the bond risk premium that is contained in fixed‐rate mortgage payments. Only older, risk‐averse investors hold some fixed‐rate mortgage debt. Together with a position in short‐term bonds this enables them to hedge against changes in the real interest rate, while the inflation exposure of the debt and bond positions cancel out. Hedging house price changes with bonds only occurs at the end of the life cycle. Early in the life cycle short‐sale constraints prevent an effective hedge.     

Long-term covered interest parity and the international swap market

This paper examines the pricing of long-term forward exchange contracts. It is established empirically that the traditional covered interest arbitrage pricing relationship is often violated, and that the behaviour of long- and short-term forward exchange rates is substantively different. It is argued that activity in the international currency and interest rate swap markets provides a potential explanation for the observed mispricing. In particular, fixed-to-fixed currency swaps provide another form of arbitrage which can affect long-term forward exchange pricing.The author is currently a visiting Senior Fellow at the National University of Singapore. The research assistance of Barry Halwas contributed to the paper.     

Entry and Exit Behavior in the Absence of Sunk Costs: Evidence from a Price Comparison Site

This paper explores entry and exit at a price comparison site (PCS) where the sunk costs of participation are effectively zero. We first use an unbalanced panel of 295 products on NexTag.com to estimate an error correction model of net entry. Although the results support our characterization of the PCS as a zero sunk cost market in which potential sellers behave as Kirznerian entrepreneurs in responding to opportunities, it is clear the net entry flow involves participants with widely differing behavior. This is investigated by examining exit and re-entry decisions at the seller level, which reveal that size and reputation determine individual responses to market opportunities.     

An Analysis of the Ex Ante Probabilities of Mortgage Prepayment and Default

Observed mortgage prepayment and default rates have been far different than the ruthless option exercise rates predicted by contingent claims models of mortgage pricing. The discrepancies have been attributed to both the competing-risk nature of prepayment and default and to transactions costs. This paper tries a different means of reconciliation. We introduce a third stochastic process, household income, into the usual pricing model that includes only the spot interest rate and the house price. The presence of income allows considering consumption-theoretic determinants of termination. The role of mortgage underwriting rules in restricting optimal prepayment is also explicitly modeled. Numerical ex ante prepayment and default rates based on the theoretical model come much closer to historical experience.     

The Substitutability of Real Estate Assets

This paper investigates the degree of substitutability between securitized real estate assets and real estate assets whose prices are appraisal-based. Given the insensitivity of unsecuritized asset's returns to the returns on stock market indices, equilibrium asset pricing models cannot be used to compare these two avenues of investment. Two assets are deemed substitutable if the information sets underlying unbiased, minimum error variance estimates of their pricing parameters are identical. The empirical evidence shows that the prices of the transactions-based assets—real estate investment trusts and the stock price index of the home building industry—follow a random walk while the prices of the appraisal-based assets—FRC/NCREIF indices—do not. The variance decompositions of the vector autoregressions also show that the level of economic activity helps predict the price indices of appraisal-based assets while the stock market index and the term structure of interest rates are better predictors of the prices of transactions-based assets     

The Effect of Consumer Switching Costs on Prices: A Theory and its Application to the Bank Deposit Market

As demonstrated by Klemperer (1987), if households face a cost of switching among brands of a differentiated good, pricing is likely to be more competitive, the greater is the fraction of customers that move into or around the market. I generalize this theory to a world with arbitrary market structure and test it empirically using panel data on bank retail deposit interest rates. I find that the amount of household migration in a market has a significant competitive influence on price markups, that is, a positive effect on the level of deposit interest rates. Consistent with the model, the magnitude of this effect depends in some cases upon the degree of market concentration.     

Profitability of Office Rental Market in Seoul: An Application of Simultaneous Structural Equations

This article is concerned with the estimation of excess rates of return on the office rental market in Seoul using a simultaneous structural equation model. The office rental market in Seoul is spatially divided into CBD and non-CBD, and the model has three behavior equations of Chonsei price, monthly rent and key deposit, with two identity equations of conversion rate and excess rate of return. This article reveals that it would be rational for the owners to ask tenants for a higher deposit with a lower monthly rent under increasing interest rates because the interest rate has a positive effect on the Chonsei deposit and the key deposit, but a negative effect on the monthly rent. Although high nominal interest rate and low economic growth reduce the excess rate of return on both submarkets, the non-CBD office rental market would be more profitable than the CBD market despite lower levels of the monthly rent and key deposit.     

The Relationship between Median and Constant Quality House Prices: Implications for Setting FHA Loan Limits

This paper examines the relationship between the asset price of housing and median sales price. We demonstrate: (1) median house prices (as reported by the National Association of Realtors) overstate the increase in constant-quality house prices by about 2% per year over the 1976–1985 period; and (2) regional differences in median house prices and their rates of increase, respectively, are systematically related to regional differences in real incomes and their rates of increase. We use these results to evaluate the recent proposal to raise the FHA maximum loan limit ceiling from the current ceiling of $124,750 to 95% of the area median house price.     

CPF stocks: Prices,returns and volatility

We identify a unique phenomenon in the Central Provident Fund (CPF) stocks where stock prices increase in the absence of fundamental changes in firm value. CPF stocks are stocks endorsed by the Central Provident Fund Board in Singapore as approved investment for its members. CPF stocks offer significant price appreciation and value preservation as well as abnormal returns in the bull market before the October 1987 market crash. We find evidence of noise trading in bull markets and price pressure effects that persist through bearish market conditions.The authors are from the Department of Finance and Banking, National University of Singapore.     

Mortgage Pricing: Some Provisional Empirical Results

We test some of the qualitative properties of mortgage pricing models. The models use option pricing techniques, focusing on prepayment as a call option. They imply a quite nonlinear relationship between mortgage price and coupon, interest rates and volatility. We test for both the first and second derivatives of the effects of these variables using data on Ginnie Mae mortgage backed securities. We find that the model is largely supported by the data.     

Impact of price limits on Taiwan security returns

The paper investigates the effects of daily price limits imposed by the R.O.C. Government on shares listed on the Taiwan Stock Exchange. The study is performed on nineteen blue-chip stocks from six industries. For each sample stock, the daily returns (from 4 January 1986 to 24 October 1987) are divided into three groups: (A) first experimental, (B) second experimental and (C) control groups. Each sample point in groups A and B consists of one event day and the following six trading days. Event day is defined to be the day the stock price reaches the upper (lower) price limit. Group C comprises all other days, except ex-dividend days. Group C data are used in the market model to obtain the alpha and beta estimates for that stock. These estimates are then used to (CARs) embedded in data sets A and B. The preliminary results of this research suggest severe violation of the random walk hypothesis. Further, the impact of government imposed price limits on stocks varies across stocks. While several patterns of CARs of stock return are observed, the results suggest existence of potential profitable short-run investment strategies among several sample stocks in this study.We are most grateful to the National Science Council of Taiwan and National Chiao-Tung University for providing the data set, SPIT. This paper has benefitted from the discussion in the conference.