A comparative computational and behavioral analysis of real estate performance. Anchoring on the post-financial crisis

DOIhttps://doi.org/10.1108/JPIF-09-2016-0069
Published date03 April 2017
Date03 April 2017
Pages290-320
AuthorJames R. DeLisle,Terry V. Grissom
Subject MatterProperty management & built environment,Real estate & property,Property valuation & finance
A comparative computational and
behavioral analysis of real
estate performance
Anchoring on the post-financial crisis
James R. DeLisle
Department of Global Entreprenuership and Innovation,
University of Missouri Kansas City, Kansas City, Missouri, USA, and
Terry V. Grissom
Department of Economics and Econometrics, Ely Research Institute,
Fernandina Beach, Florida, USA
Abstract
Purpose The purpose of this paper is to investigate changes in the commercial real estate market dynamics
as a function of and conditional to the shifts in market state-space environment that can influence
agent responses.
Design/methodology/approach The analytical design uses a comparative computational experiment to
address the performance of property assets in the current market based on comparison with prior structural
patterns. The latent variables developed across market sectors are used to test agent behavior contingent on
the perspectives of capital asset pricing conditionals (CAPM) and a behavioral momentum/herd construct.
The state-space momentum analysis can assist the comparative analysis of current levels and shifts in
property asset performance given the issues that have arisen with the financial crisis of 2007-2009.
Findings An analytic approach is employed framed by a situation-dependent model. This frame considers
risk profiles characterizing the perspectives and preferences guiding a delineated market state. This
perspective is concerned with the possibility of shifts in market momentum and representativeness
conditioning investor expectations. It is observed that the current market (post-crisis) has changed
significantly from the prior operations (despite the diversity observed in prior market states). The dynamics
of initial findings required an additional test anchored to the performance of the general capital market and
the real economy across time. This context supports the use of a modified CAPM model allowing the
consideration of opportunity cost in a space-time dynamic anchored with the consideration of equity, debt,
riskless asset and liquidity options as they varied for the representative agents operating per market state.
Research limitations/implications This paper integrates neoclassical and behavioral economic
constructs. Combines asset pricing with prospect theory and allows the calculation of endogenous time-
preferences, risk attitudes and formulation and testing of hyperbolic discounting functions.
Practical implications The research shows that market structure and agent behavior since the financial
crisis has changed from the investment and valuation perspectives operating as observed and measured from
1970 up to 2007. In contradiction to the long-term findings of Reinhart and Rogoff (2008), but in compliance
with common perspectives and decision heuristics often employed by investors, this time things have
changed! Discounting and expected rates of return are dynamic and are hyperbolic and not constant. Returns
and investment for property assets are situational (market state-space specific) and offer a distinct asset class,
not appropriately estimated by many of the traditional financial models.
Social implications Assist in supporting insights to measure in errors and equations that result in
inefficient resource allocation and beta discounting that supports the financial crisis created by assets subject
to long-term decision needs (delta function).
Originality/value The paper offers a combination and comparison of neoclassic asset pricing using a
modified CAPM (two-pass) approach within the structural frame of Kahneman and Tverskys (1979) prospect
theory. This technique allows the consideration of the effects of present bias, beta-delta functions and the
operation of the Allais Paradox in market states that are characterized by gains and losses and thus risk
aversion and risk seeking behavior. This ability for differentiation allows for the development of endogenous
time-preferences and hyperbolic discounting factors characteristic of commercial property investment.
Keywords Framing, Conditional CAPM, Endogenous time-preferences,
Momentum and behavioural pricing analysis, Real estate investment performance, Risk attitude
Paper type Research paper
Journal of Property Investment &
Finance
Vol. 35 No. 3, 2017
pp. 290-320
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-09-2016-0069
Received 2 September 2016
Revised 5 December 2016
Accepted 8 December 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
290
JPIF
35,3
The performance of the commercial real estate market following the recession and
financial crisis of 2007-2009, is characterized as a dichotomy. The confusion and
uncertainty of this market phase is defined by either: divergent agents(α(t)) perceptions
of this period as one of growth and rebound from the crisis and recession; or, as a time of
slow recovery reflecting a disruptive response to the fundamentals and total uncoupling
of asset performance from market and financial structures. This dichotomous perception
of the market and focus on alternative decision factors tends to vary among the diverse
risk profiles of the agents operating in the market, their operating associations with
institutions/rules, geographical positions, and temporal phases and durations in and over
which they operate. The diversity in agents(α(t)) characterization of the market state (s(t))
and conditional asset performance path are modeled as dynamic functions of the asset
attributes ( χ
it
) and information signals (Φ). These indicators are linked to and considered
significant factors affecting the performance paths affected by the financial crisis and the
Great Recession.
A systematic literature search combined with experiences, heuristics and observations
that identify the relevant factors and market signals are also listed in Table I. It should be
noted, the characteristics and factors noted in the current market as they relate to the causal
associations affecting operating agents did not just recently occur as suggested by models
inferring a present (term) bias. Rather, they evolved over time in an adaptive process that
helped form the current construct and analytical decision framework affecting agents.
To capture this phenomenon, the latent state variables are analyzed to evaluate
difference/distance measures. This approach supports quantitative and cardinal estimates
of the categorical and dimensional variables noted in the literature.
The quantification of the variables presented in Table I was developed by comparison
and computation across state-space cycles (constructs) with market regimes being used as
different and distinct temporal subsamples. While some of the changes that occurred in the
aftermath of the financial crisis were cyclical in nature, others were more structural and had
an enduring impact on economies, markets and market drivers. These structural changes
are a significant concern since the state of the real estate market and general economy can
both exhibit uncertain and contradictory signals. For example, the post-crisis market can
either be characterized as a recovery or even post-recession boom market by some agents, or
as a term of limited potential and constrained entrepreneurial opportunities by others.
The conflicting perspectives and the expectations inferred, which can range from positive to
marginally negative are associated with uncertainty surrounding prior causal factors and
the underlying reasons that led to and defined, the financial crisis of 2007-2009 and the
Great Recession that followed on its heels.
As will be discussed in the literature review, changes in the behavior of agents
during the post-crisis period can be related to different factors that were associated with
the crisis and had on-going, lagged effects. Isolating these factors and their impacts is
complicated by the fact that many of them are unobservable but create intractable
latent causes. Since these factors are logically related to the crisis and the resultant
financial friction and market changes, incorporatingtheminanempiricalstudyposesan
analytical problem. This challenge is complicated by the fact that neither the literature nor
thepopularpressapproachtheminacommonmanner that could yield valid and reliable
units of measurement or comparison. To address this issue, the models presented in this
paper require a preliminary stage in which quantifiable or cardinal measures are
developed. These measures address the limitations emanating from the categorical,
dimensional and heuristics measures derived from anecdotal and survey data. It also
supports analysis of the herding/momentum trend that affects agent behavior as well as
decision artifacts capturing investorsalternative risk profiles and agentspreferences on
expected returns.
291
Real estate
performance

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