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Hedging Effectiveness of Total Returns Swaps: Application to the Japanese Market

Author

Listed:
  • Yoshiki Kago
  • Charles Ward

    (Department of Real Estate & Planning, University of Reading)

Abstract

The development of the real estate swap market offers many opportunities for investors to adjust the exposure of their portfolios to real estate. A number of OTC transactions have been observed in markets around the world. In this paper we examine the Japanese commercial real estate market from the point of view of an investor holding a portfolio of properties seeking to reduce the portfolio exposure to the real estate market by swapping an index of real estate for LIBOR. This paper explores the practicalities of hedging portfolios comprising small numbers of individual properties against an appropriate index. We use the returns from 74 properties owned by Japanese Real Estate Investment Trusts over the period up to September 2007. The paper also discusses and applies the appropriate stochastic processes required to model real estate returns in this application and presents alternative ways of reporting hedging effectiveness. We find that the development of the derivative does provide the capacity for hedging market risk but that the effectiveness of the hedge varies considerably over time. We explore the factors that cause this variability.

Suggested Citation

  • Yoshiki Kago & Charles Ward, 2008. "Hedging Effectiveness of Total Returns Swaps: Application to the Japanese Market," Real Estate & Planning Working Papers rep-wp2008-05, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:repxwp:rep-wp2008-05
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    File URL: http://www.henley.reading.ac.uk/rep/fulltxt/0508.pdf
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    References listed on IDEAS

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    1. repec:bla:jfinan:v:44:y:1989:i:2:p:479-86 is not listed on IDEAS
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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