Can common risk factors explain infrastructure equity returns? Evidence from European capital markets

This is the first paper to test the ability of conventional asset pricing models to explain the excess returns of European infrastructure stocks. Specifically, we firstly run the well-known Fama and French three-factor model, including three common stock market factors (market risk, size risk and value risk), and subsequently augment the model with two common bond risk factors (term and default risk), as infrastructure firms should be closely related to bond markets. The times-series regressions span the period from July 1992 to June 2014 and are conducted using an individually created infrastructure equity data-set. With the help of an intensive screening process, we only include those infrastructure stocks that in fact own and/or operate physical infrastructure. The results reveal that the three-factor model is unable to capture most of the variation in infrastructure returns. Therefore, bond risk factors should be included in asset pricing models in order increase the goodness of fit, as infrastructure stocks prove to be sensitive to interest rate changes. Nevertheless, even the augmented asset pricing model leaves a substantial part of the variance unexplained, thus indicating that infrastructure firms exhibit a high level of idiosyncratic risk. In addition, the results suggest that there may be further risk factors which should be investigated in future studies.     

Property portfolio allocation: A multi‐factor model

Summary

The objective of the paper is to describe a method of portfolio allocation currently being developed in the property sector. The model applies a multi‐index approach to portfolio decision making and enables investors to explore the effects of changing their allocational decisions. In estimating the parameters required for the model, we explain the method which can be used to adjust for smoothing effects on returns caused by the valuation process. Although the model is still at the development stage, the approach is general and can be applied both to allocating funds within a mixed‐asset portfolio or between different types of property within a wholly property‐orientated portfolio.     

Integration of VaR and expected utility under departures from normality

This article identifies the level of the expected utility (EU) risk aversion and Value-at-Risk (VaR) confidence level that yield the same choice from a given distribution of outcomes, and thus allow for consistent application of the two criteria. The result for a given distribution is an explicit mapping between risk aversion under EU and VaR, for both normal and nonnormal distributions. The Cornish–Fisher expansion is used to establish adjusted mean-deviates for nonnormal outcome distributions and the investor's preference function is expanded to include elements for variance, skewness, and excess kurtosis. A farm-level application with nonnormal revenue distribution illustrates these approaches.     

Landlords and farmers: implications of disparities in bargaining power for tenancy in agriculture

The equilibrium allocation of owner operated and rental land in the agricultural sector is examined given risk averse agents, risky returns and asset price risk. The model is extended to account for disparities in bargaining power among landlords and farmers. In the absence of disparities, the competitive equilibrium allocation satisfies the general conditions for optimal risk sharing with an adjustment factor similar to the optimal hedge ratio. Differences in bargaining power result in deviations from the optimal risk sharing conditions. Numerical simulations of tenancy structure are conducted for a developed agricultural economy exposed to various forms of risk. Estimates of parameter values representing the riskiness of returns and asset prices in this study are based on vector auto regressive techniques. The simulations show that a substantial reduction of the rental ratio is obtained in a situation where farmers are equally or more risk averse than landlords. Consequently, the results indicate that the importance of the tenancy institution as a risk sharing mechanism is severely mitigated in the presence of asset price risk, risky returns, relatively risk averse farmers and disparities in bargaining power.     

The economic value of using range-based volatility for international REIT diversification

Conditional volatility of financial assets can be estimated through either a return-based estimator or a range-based estimator. This paper investigates whether the range-based estimator can lead to economic benefits over a return-based benchmark. We take an asset-allocation perspective and compare the performances of an all-REIT international portfolio using the two estimators. We find that the portfolio constructed based on the range-based estimator significantly outperforms the one constructed based on the return-based estimator. This conclusion is robust to different portfolio performance measures and asset allocation periods. We also demonstrate the implementability of the range-based portfolio by showing that the economic value of using it is sufficient to compensate for transaction costs. Overall, our findings suggest that using range-based volatility adds value to international diversification among real estate markets.     

Capitalization of Farm Policy Benefits and the Rate of Return to Policy-Created Assets: Evidence from California Dairy Quota

The rate of return to ownership of California dairy quota is about 27% per year—well above that of typical financial assets, but in line with other measured returns to agricultural quotas. Ownership of dairy quota does not contribute positively to total variation of typical portfolios, including those of dairy farm assets, and so contributes little or no portfolio risk. A plausible alternative hypothesis for the high rate of return is that quota owners see significant risk of policy change that would reduce future quota values. That is, they face default risk in quota ownership.     

Real estate market efficiency

Summary

The application of modern portfolio theory to the investment in shares and bonds is integrally connected with the efficient market hypothesis. The requirement of multivariate normality of security returns is a sufficient condition for equilibrium asset pricing models such as the capital asset pricing model to theoretical work. Nevertheless the empirical relevance in decision making is firmly based on the efficiency of the capital market. If real estate investors are to avail themselves of these techniques it is first necessary to ensure the requirements of the efficient market hypothesis are satisfied in the context of the property market. This paper reports the results of such an inquiry into the British and Australian real estate markets.     

Assessing Credit Risk in an Agricultural Loan Portfolio

We show that agricultural lenders can implement a credit risk model that uses their loan portfolio data and complies with the new Basel Capital Accord without requiring Merton-type model assumptions about underlying asset price volatility. A credit risk model is described and calibrated to the loan portfolio of a farm lender. The model is used to produce plausible estimates of expected loss, unexpected loss, and credit value-at-risk (VaR) at the portfolio and subportfolio (sector) levels. The lender could use these kinds of estimates to meet regulatory requirements or to adjust the level of capital in response to changing economic conditions.
Nous montrons que les prêteurs agricoles peuvent appliquer un modèle de risque de crédit qui permet d'utiliser des données tirées de leur portefeuille de prêts et qui respecte le nouvel accord de Bâle sur les fonds propres, sans qu'il soit nécessaire d'utiliser les hypothèses du modèle de Merton sur la volatilité des prix des actifs. Nous avons décrit un modèle de risque de crédit et l'avons calibré en fonction du portefeuille de prêts d'un prêteur agricole. Le modèle est utilisé pour effectuer des estimations plausibles quant aux pertes prévues, aux pertes imprévues et à la valeur à risque au niveau du portefeuille et du sous-portefeuille. Le prêteur pourrait utiliser ce genre d'estimations pour respecter les exigences réglementaires ou pour rajuster le niveau de fonds propres en fonction de l'évolution de la conjoncture économique.     

Measuring Price Risk on UK Arable Farms

Price risk is estimated for a representative UK arable farm using value‐at‐risk (VaR). To determine the distribution of commodity returns, two multivariate generalised autoregressive conditional heteroscedasticity (GARCH) models, with t‐distributed and normally distributed errors, and a RiskMetrics^TM model are estimated. Returns show excess kurtosis and that the GARCH model with t‐distributed errors fits best. Estimates of VaR differ between models: both GARCH models perform well but the RiskMetrics^TM model underestimates expected losses. UK arable farms face substantial price risk.     

Sources and Measurement of Agricultural Productivity and Efficiency in Canadian Provinces: Crops and Livestock

This paper measures and assesses the variation in total factor productivity (TFP) growth among Canadian provinces in crops and livestock production over the period 1940–2009. It also determines if agricultural productivity growth in Canada has recently slowed down as indicated by earlier studies. The paper uses the stochastic frontier approach that incorporates inefficiency to decompose TFP growth into technical change (TC), scale effect (SE), and technical efficiency change. The results indicate that productivity changes were mainly driven by TCs for crops, while the productivity changes in livestock was mainly driven by SEs and technical progress. Though change in technical efficiency is mainly positive (except for New Brunswick and Nova Scotia), its contribution to productivity growth was very little for the provinces. We also found that over the entire period, the productivity growth rates for the crop subsector are on average higher for the Prairie provinces than for the Eastern and Atlantic provinces. On the other hand, the productivity growth rates in the livestock subsector are on average higher in the Eastern and Atlantic provinces than in the Prairie region with the exception of Manitoba. Finally, we found that though there is some evidence of a recent decline in productivity growth for the crops subsector, there is no such evidence in the livestock subsector.     

The restructuring of the institutional real estate portfolio in the UK

Real estate investment portfolios of financial institutions have seen dramatic changes over the last three decades or more. Historically such property investment decisions have been seen within a portfolio diversification paradigm that has sought to balance risk and return. This paper considers the role of the supply of assets in the determining and constraining the UK institutional portfolio. The supply of real estate assets not only expands during property booms but has also been transformed by a long term urban development cycle as cities adapt to cars and the ICT revolution that has brought new property forms. The research examines long term trends in investment change by disaggregating into ten property forms rather than the usual three land use sectors. It then assesses to what extent investment patterns can be explained in terms of portfolio theory, short term net returns of individual sectors or driven by the supply of real estate assets. It concludes that the supply of real assets is an overlooked explanation.     

Agricultural dynamics in Thailand, Indonesia and the Philippines

The introduction of new high-yielding varieties of cereals in the 1960s, known as the green revolution, dramatically changed the food supply in Asia, as well as in other countries. In the present paper we examine, over an extended period, the growth consequences for agriculture in Indonesia, Thailand and the Philippines. Despite geographical proximity, similar climate and other shared characteristics, gains in productivity and income differed significantly among the countries. We quantify these differences and examine their determinants. We find that the new technology changed the returns to fertilisers, irrigated land and capital, all of which proved scarce to varying degrees. Complementing technology-related changes in factor use were investments, public and private, driven in part by policy. We find that factor accumulation played an important role in output growth and that accumulations from policy driven investments in human capital and public infrastructure were important sources of productivity gains. We conclude that policies that ease constraints on factor markets and promote public investment in people and infrastructure provide the best opportunities for agricultural growth.     

Assessing the Financial Performance of Forestry-Related Investment Vehicles: Capital Asset Pricing Model vs. Arbitrage Pricing Theory

Capital asset pricing model (CAPM) and arbitrage pricing theory (APT) are used to assess the financial performance of eight forestry-related investment vehicles. Although results from APT support previous findings from CAPM about timberland investments, three bodies of evidence show that APT findings are more robust. The major conclusions are (a) institutional timberland investments and timberland limited partnerships have a low risk level and excess returns; (b) forestry industry companies have not earned risk-adjusted returns, and the performance of medium forest industry firms is worse than that of large firms; (c) stumpage price does not resemble the return generation process of timberland investments; and (d) lumber futures have little excess return.     

The 4% rule: Does real estate make a difference?

This paper examines the wealth maximisation and preservation effects of including commercial real estate in retirement-phase portfolio management. Prior research addresses the role of real estate during the wealth-accumulation phase of the investor lifecycle; however, little is known about the contribution of real estate during the invest-and-spend, or decumulation, phase. To address this issue, we estimate short-fall risk based on the widely known 4% Rule. We use pricing data for multiple asset classes and simulation techniques, combined with a robust correlation structure, to examine: short-fall risk sensitivity to alternative spending rules; the impact of public vs. private real estate allocations; wealth preservation as an investment objective; and the effect of real estate on upside, or wealth maximisation, potential. We find short-fall risk in a decumulation portfolio decreases with substantial allocations to real estate. This result holds for a portfolio including either public or private real estate. Additionally, and under most conditions, the best performing decumulation-phase portfolios include a real estate allocation with both public and private real estate exposure. These results have significant implications for investors, whether they be retirees, plan administrators or endowments, as well as financial economists studying the lifecycle of investment decisions.     

Risk Management for Grain Processors and “Copulas”

The importance of calibrating hedging strategies for processors has escalated primarily due to the sharply increased volatility of futures, product, and by‐product prices. The purpose of this paper is to analyze price risk‐management strategies for wheat flour milling using copula distributions. While the application is for flour milling, it has similarities with other processing industries which confront one or more ingredients, one or more outputs, and futures for one of the commodities and/or products. The paper develops utility maximizing models encompassing expected return and risk. Alternative scenarios are evaluated. First, the models were used to derive optimal hedge ratios, as well as various measures of risk and return under alternative scenarios, and hedge durations. The results indicated hedge ratios are typically less than 1. The hedge ratios for the Mean‐value‐at‐risk (M‐VaR)‐Copula model increased with greater durations. Second, the VaR for the M‐VaR‐Copula was in most cases less than the noncopula specifications. Thus, noncopula models may over state risk as represented by VaR.     

The idiosyncratic risks of a Shariah compliant REIT investor

This paper investigates the impact of Shariah compliant investment principles on the idiosyncratic risks of a Shariah compliant REIT investor. The importance of idiosyncratic risks in explaining cross-sectional returns of a constructed Shariah compliant REIT investor’s portfolio is further examined in this paper. In all constructed portfolios examined, there is a positive and significant relationship between expected idiosyncratic volatility and expected REIT returns of the constructed Shariah compliant portfolio (GCC Shariah compliance standards). This result is consistent and persistent after robustness tests are carried out. As such, idiosyncratic risks are an important factor to consider in the pricing of Shariah compliant REIT stock returns. On further examination, the significant relationship as seen in the constructed Shariah compliant portfolio can be explained from the firm-specific risks of the residential REIT sector which is the most dominant sector during the period of investigation. The implications of these results also point to the importance of Shariah compliance standards and screening methods which is a significant feature associated with the understanding of the relationship of idiosyncratic risks on expected REIT returns of Shariah portfolios. Results show contrasting results between a less-restrictive and restrictive Shariah compliant portfolio. We find a significant relationship between expected returns and the idiosyncratic risks specifically in the restrictive Shariah compliant portfolio.     

Ride the trend: Is there spread momentum profit in the US commodity markets?

Some previous researchers have argued that trading strategies based on calendar spread time series momentum (STSM) can deliver significant returns (Szymanowska et al. 2014; Boons and Prado 2019), which, if true, is at odds with the efficient market hypothesis. These arguments however, do not exclude the unrealisable futures contract roll yield and are also affected by other empirical and statistical issues that may lead to misleading results. With more than 30 years of data, we investigate STSM in 22 US commodity futures markets. First, we assess whether past spread returns can predict future returns, a necessary condition for the existence of momentum. We find predictability to be very weak after correcting for the issues affecting prior research. Second, we implement STSM-based investment strategies. We compare STSM profits for individual markets and portfolios to profits generated by a simple long-only benchmark strategy that does not require any predictability. STSM does not generate returns statistically different from the benchmark trading strategy, with both strategies generating very low or negative returns. For the momentum to outperform the benchmark strategy, predictability should be three times larger than observed from real data, but would entail substantial downside risk. In sum, the empirical evidence indicates that returns from STSM-type strategies are illusive for the commodities and period studied. Our results strongly suggest that inclusion of unrealisable roll yield generates the illusion of profitable STSM trading strategies in previous research.     

Should Saskatchewan Farmland be Part of Your Investment Portfolio?

Farmland has been a good investment over the past 30 years, as part of an internationally diversified medium‐risk portfolio. For average or medium levels of risk, farmland can enhance the financial performance of an investment portfolio. Investors who choose to maintain a low‐risk portfolio will not include farmland and, similarly, the gains at the high‐risk level are also very minimal. The financial gains from farmland are a result of its negatively correlated returns with other equity markets. When added to an equity portfolio, the risk is reduced while maintaining the same rate of return on investment. This is especially true of the medium‐risk portfolios. Farmland investment has associated problems including illiquidity, poor marketability and asset lumpiness. A potential solution to these problems is to allow the organization of a Saskatchewan (or Canadian) farmland mutual fund. L'achat de terres agricoles s'est révélé un bon placement dans les 30 dernières années dans le cadre d'un portefeuille à risque modéré internationalement diversifié. Dans la catégorie de risque moyen ou modéré, la propriété de terres agricoles peut accroître le rendement économique d'un poriefeuille de placement. Les investisseurs qui choisissent de maintenir un poriefeuille à faible risque ne s'intéresseront pas aux terres agricoles, et par ailleurs, les gains au niveau de risque élevé sont également trés maigres. Les gains financiers tirés de la propriété de terres agricoles sont la résultante de la corrélation négative du rendement économique avec celle des autres marchés de valeurs. En ajoutant les terres agricoles à un portefeuille de valeurs mobilig?res, on abaisse le niveau de risque tout en conservant le même taux de rendement sur les placements. C'est particulièrement vrai des portefeuilles à risque modéré. Les placements dans les terres agricoles component des inconvénients comme l'illiquidité, la difflculté de revendre et l;indivisibilité. Une solution à ces proxblèmes serait d'autoriser la constitution d'un fonds mutuel de terres agricoles, soit pour la province de Saskatchewan ou pour l'ensemble du pays.     

Population growth,agricultural intensification,induced innovation and natural resource sustainability: An application of neoclassical growth theory

Using a simple neoclassical type growth model including both man-made and natural capital as inputs to production, the theoretical basis for a U-shaped relationship between agricultural intensification and farm household investment in renewable resource capital is established. As development of technology, infrastructure, or markets increase the relative return to investment in man-made capital over natural capital, resource depletion occurs as man-made capital is substituted for lower return natural capital. Once returns are equalized, both man-made and natural capital are accumulated. If labor and these forms of capital are complementary, the output effects outweigh the substitution effects in the long run, leading to net accumulation of natural as well as man-made capital as a result of such technological or market development. Population growth also induces investment in both man-made and natural resource capital in the long run by increasing their marginal products. However, population growth causes declining per capita levels of both natural and man-made capital and production per capita in the long run, if technology is fixed and decreasing returns to scale. The model thus supports the Boserupian argument of induced intensification and resource improvement, as well as the Malthusian argument of the impoverishing effects of population growth. However, population growth may also induce development of infrastructure, markets, and technological or institutional innovation by reducing the fixed costs per capita of these changes, though these developments may not occur automatically. Government policies can play a large role in affecting whether these potential benefits of population growth are realized. In addition, credit policies may reduce resource degradation caused by substitution of man-made for natural capital, by allowing farmers to accumulate man-made capital (such as fertilizers) without depleting their natural capital. Policies to internalize the external environmental costs of using man-made capital will reduce both types of capital and production, indicating a clear trade-off between addressing environmental concerns on the one hand and reducing poverty and promoting resource conservation investments on the other. By contrast, internalizing the external benefits of investments in resources increases wealth and production per capita in the long run. The ‘intertemporal externality’ due to a higher private than social rate of time preference does not justify interventions to promote investments in resource capital; rather it argues for the promotion of savings and investment in general.     

Is late really better than never? The farmer welfare effects of pineapple adoption in Ghana

Export agriculture offers potentially high returns to smallholder farmers in developing countries, but also carries substantial market risk. In this article we examine the intertemporal welfare impact of the timing of a farmer's entry into the export pineapple market in southern Ghana. We examine whether farmers who never cultivated pineapple are better or worse off than farmers who decided to adopt pineapple earlier or later relative to their peers and experienced a significant adverse market shock several years prior to our endline survey. We use a two‐stage least squares model to estimate the causal effect of duration of pineapple farming on farmer welfare. Consistent with economic theory, we find that earlier adoption of the new crop brings greater welfare gains than does later uptake. But we find that the gains to later uptake of pineapple—just before the market shock—are small in magnitude, just 0.1 standard deviations of a comprehensive asset index, indicating that the gains to adoption may be precarious and depend on the context, in particular on the severity of prospective market shocks.