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Thrift Asset‐Class Returns and the Efficient Diversification of Thrift Institution Portfolios

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  • Rebel A. Cole
  • Joseph A. McKenzie

Abstract

We estimate quarterly return series from March 1984 through December 1989 for 10 classes of thrift assets using the statistical cost‐accounting methodology of Hester and Zoellner (1966). We then use these return series to estimate mean‐variance efficient frontiers for all thrifts, for thrifts that were well capitalized two years earlier and for thrifts that were insolvent two years earlier. Our results show that neither the asset restrictions existing before nor those in effect after passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 would have prevented thrifts from reaching most of the portfolios along the efficient frontier. The actual portfolio chosen by well‐capitalized thrifts is close to the estimated efficient frontier, while the actual portfolio chosen by insolvent thrifts is located far from the frontier in the high‐risk end of investment space. These findings, coupled with the high proportion of nontraditional assets in the actual portfolio chosen by insolvent thrifts, support the hypothesis that moral hazard induced thrifts to take on investments that were excessively risky from the deposit insurer's point of view.

Suggested Citation

  • Rebel A. Cole & Joseph A. McKenzie, 1994. "Thrift Asset‐Class Returns and the Efficient Diversification of Thrift Institution Portfolios," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 95-116, March.
    • Handle: RePEc:bla:reesec:v:22:y:1994:i:1:p:95-116
    DOI: 10.1111/1540-6229.00627
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    1. John T. Rose & John D. Wolken, 1986. "Statistical cost accounting models in banking: a reexamination and an application," Staff Studies 150, Board of Governors of the Federal Reserve System (U.S.).
    2. Rebel A. Cole & Joseph A. McKenzie & Lawrence J. White, 1990. "The causes and costs of thrift institution failures: a structure- behavior-outcomes approach," Financial Industry Studies Working Paper 90-5, Federal Reserve Bank of Dallas.
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    Cited by:

    1. Chinmoy Ghosh & Randall S. Guttery & C. F. Sirmans, 1998. "Contagion and REIT Stock Prices," Journal of Real Estate Research, American Real Estate Society, vol. 16(3), pages 389-400.
    2. Paris, Francesco M., 2005. "Selecting an optimal portfolio of consumer loans by applying the state preference approach," European Journal of Operational Research, Elsevier, vol. 163(1), pages 230-241, May.
    3. Brewer, Elijah III & Jackson, William III & Mondschean, Thomas S., 1996. "Risk, regulation, and S & L diversification into nontraditional assets," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 723-744, May.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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