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APE-7: Alternative Asset Classes
“We’ll Always Have Paris”: Out-of-Country Buyers in the Housing Market
1UNC Chapel Hill, United States of America; 2HEC Paris
This paper studies the investment decisions and price impact of non-resident foreigners in the Paris housing market, employing unique micro-level transaction data over the period 1992–2016. We find that these “out-of-country” buyers generally purchase relatively small but high-quality properties in desirable neighborhoods and in areas with high ratios of compatriots. Ceteris paribus, they pay higher prices, hold for longer, and realize lower capital gains, highlighting the importance of information asymmetries and search costs in residential real estate. Crucially, however, out-of-country buyers’ quality-controlled purchase prices are also positively affected by home-country economic conditions, which suggests that global variation in the willingness-to-pay for real estate affects pricing in hotspots such as Paris. When instrumenting out-of-country demand, we find that it has pushed up prices of ex ante less valuable properties that have nonetheless been exposed to such demand.
How Alternative Are Private Markets?
1University of Oxford; 2ESSEC Business School; 3Yale School of Management
We introduce a new statistical methodology to form portfolios of private funds with similar risk-return profiles, which we interpret as private factors. We find that two private factors are priced. The first priced factor is dominated by large, non-dollar, buyout, and expansion capital funds. It is well spanned by four commonly used public equity factors. The second priced factor is dominated by small, real estate, and mezzanine funds, is unspanned and has returns that are concave on public equity market returns. A non-priced factor, although well spanned by public equity factors, provides significant diversification benefits and an inflation hedge. This factor is dominated by large funds of all types.
Crude Awakening: Oil Prices and Bond Returns
1University of Lausanne; 2Shandong University; 3Shanghai University of Finance and Economics
Oil price is known to fail to predict asset returns because it is too noisy. We construct an oil trend factor that filters out noise and provide evidence that it performs well at predicting the bond risk premium. This result holds in developed and emerging markets, in sample and out of sample. Notably, the predictive power of the oil trend factor is unspanned by the Cochrane and Piazzesi (2005) factor and other standard macroeconomic factors. A puzzle emerging from our results is that oil price increases, which are generally viewed as preceding economic recessions, are in fact associated with subsequent lower bond returns. To resolve this puzzle, we demonstrate that not all oil price shocks are alike: oil demand and supply shocks have opposite implications for economic activity and the risk premium. We find that the oil trend factor is mainly related to demand shocks, so that increases in the oil trend tend to signal strong economy and lower bond returns.