Economic Risk Factors and Commercial Real Estate Returns

A great deal of research has focused on the links between stock and bond market returns and macroeconomic events such as fluctuations in interest rates, inflation rates, and industrial production. Although the comovements of real estate and other asset prices suggests that these same systematic risk factors are likely to be priced in real estate markets, no study has formally addressed this issue. This study identifies the growth rate in real per capita consumption, the real T-bill rate, the term structure of interest rates, and unexpected inflation as fundamental drivers or state variables that systematically affect real estate returns. The finding of a consistently significant risk premium on consumption has important ramifications for the vast literature that has examined the (risk-adjusted) performance of real estate, for it suggests that prior findings of significant abnormal returns (either positive or negative) that have ignored consumption are potentially biased by an omitted variables problem. The results also have important implications for dynamic asset allocation strategies that involve the predictability of real estate returns using economic data.     

Cities,Creativities and Urban Creative Economies: Re-descriptions and Make+Shifts from Sub-Saharan Africa

The aim of this symposium is to examine the situation of the creative economy in cities—specifically cities of sub-Saharan Africa. In this introduction we set out the case for the need to ‘re-describe’ the (much derided) phenomenon of the creative city. This task requires clarification of what is understood in academe and policy communities by the term ‘creative economy’, the pronounced growth of this sector, particularly in the global South, and its particular urban character. Secondly, in the face of conceptual and policy confusion we argue for the actually existing, and growing, importance of the urban creative economy. Thirdly, with this ground clearing achieved, we seek to frame, and focus on, the emergence of new research on the urban creative economy. Finally, we use the evidence from the symposium contributions to argue for a reformulation of the creative economy within African sub-Saharan urbanization.     

TARIFF JUMPING FOREIGN DIRECT INVESTMENT DECISION IN A QUALITY‐DIFFERENTIATED MARKET

Using a product differentiation model, this paper discusses the issue of transnational firms evading tariffs and investing directly in a host country (through foreign direct investment (FDI)). Where product quality is differentiated between foreign and host country firms and assuming a firm's quality requirement is a long‐term strategy and is not affected by a foreign firm's trade decision, we obtain the following findings. First, whether or not a host country firm produces high or low quality products, raising the quality requirement for foreign products will increase the possibility of a foreign firm choosing FDI instead of exporting a product to the host country. Second, raising the quality requirement for domestic products will lower the possibility of foreign firms choosing FDI without regard to the product's quality. Finally, given a competitor in the host country, in FDI, a foreign high‐quality product‐producing firm has an advantage over a low‐quality product‐producing firm. We also find that even when firms' quality decisions are affected by a foreign firm's trade decision, most of the above results will still hold.     

Exodus from Sovereign Risk: Global Asset and Information Networks in the Pricing of Corporate Credit Risk

Using five‐year credit default swap (CDS) spreads on 2,364 companies in 54 countries from 2004 to 2011, we find that firms exposed to stronger property rights through their foreign asset positions (institutional channel) and firms cross‐listed on exchanges with stricter disclosure requirements (informational channel) reduce their CDS spreads by 40 bps for a one‐standard‐deviation increase in their exposure to the two channels. These channels capture effects beyond those associated with firm‐ and country‐level fundamentals. Overall, we find that firm‐level global asset and information connections are important mechanisms to delink firms from their sovereign and country risks.     

Credit Availability and Asset Pricing Dynamics in Illiquid Markets: Evidence from Commercial Real Estate Markets

This article examines credit frictions and asset pricing in public and private markets with varying liquidity. We find that a tightening in credit availability is negatively related to subsequent price movements in private and public commercial real estate markets. Assets trading in illiquid segments of these markets are also susceptible to a feedback effect whereby changes in asset prices predict subsequent changes in credit availability. Controlling for investor demand, our findings suggest credit constraints play an economically significant asset pricing role in markets that are both highly levered and relatively illiquid.     

The Interim Trading Skills of Institutional Investors

Using a large proprietary database of institutional trades, this paper examines the interim (intraquarter) trading skills of institutional investors. We find strong evidence that institutional investors earn significant abnormal returns on their trades within the trading quarter and that interim trading performance is persistent. After transactions costs, our estimates suggest that interim trading skills contribute between 20 and 26 basis points per year to the average fund's abnormal performance. Our findings also indicate that any trading skills documented by previous studies that use quarterly data are biased downwards because of their inability to account for interim trades.     

Individualism and Momentum around the World

This paper examines how cultural differences influence the returns of momentum strategies. Cross-country cultural differences are measured with an individualism index developed by Hofstede (2001) , which is related to overconfidence and self-attribution bias. We find that individualism is positively associated with trading volume and volatility, as well as to the magnitude of momentum profits. Momentum profits are also positively related to analyst forecast dispersion, transaction costs, and the familiarity of the market to foreigners, and negatively related to firm size and volatility. However, the addition of these and other variables does not dampen the relation between individualism and momentum profits.