Steven Ott - Academia.edu (original) (raw)
Papers by Steven Ott
Abstract This paper examines the relationship between uncertainty and investment in the context o... more Abstract This paper examines the relationship between uncertainty and investment in the context of the real options model. Specifically, we analyze the role of built property value volatility in determining the rate of commercial real estate construction. To focus on the ...
Real Estate Economics, 2000
Neoclassical investment decision criteria suggest that only the systematic component of total unc... more Neoclassical investment decision criteria suggest that only the systematic component of total uncertainty affects the rate of investment, as channeled through built asset price. Alternatively, option-based investment models suggest a direct role for total uncertainty in investment decision making. To sort out uncertainty's role in investment, we specify and empirically estimate a structural model of asset market equilibrium. Commercial real estate time series data with two distinct measures of asset price and uncertainty are used to assess the competing investment models. Empirical results generally favor predictions of the option-based model, and hence suggest that irreversibility and delay are important considerations to investors. Our findings also have implications for macroeconomic policy and for forecasts of cyclical investment activity.
Managerial and Decision Economics, 1996
The Journal of Real Estate Finance and Economics, 2012
Land developers in select economic environments have been found to build in large increments and ... more Land developers in select economic environments have been found to build in large increments and hold substantial amounts of inventory despite their ability to mitigate risk by phasing the production of residential lots. Such behavior was observed in numerous metropolitan areas throughout the southeastern and southwestern United States in the years leading up to financial crises, resulting in inventories of tens of thousands of lots in cities such as Atlanta, Las Vegas and Orlando, just to name a few. The model presented in this paper explores the rationale behind the choices made by developers in these markets and others by extending the real options framework to concurrently estimate optimal phasing and inventory decisions for large-scale residential development projects. Modeled interactions between several variables indicate that full development, smooth phased development and lumpy development can all be optimal under different market conditions, with each pattern feeding back into inventory levels and lot pricing.
The Journal of Real Estate Finance and Economics, 2008
We model and examine the financial aspects of the land development process incorporating the indu... more We model and examine the financial aspects of the land development process incorporating the industry practice of preselling lots to builders through the use of option contracts as a risk management technique. Using contingent claims valuation, we are able to determine endogenously the land value, presale option value, credits spreads and the effects of presales on debt pricing and equity expected returns. We show that using presales options effectively shift market risk from the land developer to the builder. Results from the model are consistent with the high rates of return on equity observed in empirical surveys; they also suggest that developers may be justified in pursuing projects with substantially lower expected returns to equity when a large number of lots can be presold. Additionally, we show that presales reduce default risk dramatically for leveraged projects and can support a considerable reduction in the cost of construction financing. Large debt risk premiums are justified for highly levered projects, which helps explain the use of mezzanine financing in the land development industry to reduce expected default costs.
... Applications involving discount debt, levered lease transactions with coupon debt financing, ... more ... Applications involving discount debt, levered lease transactions with coupon debt financing, and imperfect competition in new product markets with ... University of Kentucky ( email ) College of Business & Economics Lexington, KY 40506-0034 United States 606-257-2490 (Phone ...
Financial Management, Feb 1, 2001
This paper studies the effects of noise on contingent-claim values, option exercise policies and ... more This paper studies the effects of noise on contingent-claim values, option exercise policies and the incentives to acquire information to improve irreversible exercise decisions. We determine distributional parameters for the conditional expected asset value in which the noise and the underlying asset value dynamics follow normal, lognormal and mean-reverting processes. Option prices are found to depend on the revealed variance of asset price, suggesting that only information that can be acted upon are useful in formulating option exercise policy.
... David C. Mauer Edwin L. Cox School of Business Southern Methodist University PO Box 750333 Da... more ... David C. Mauer Edwin L. Cox School of Business Southern Methodist University PO Box 750333 Dallas, TX 75275-0333 phone: (214) 768-4150 email: dmauer@mail.cox.smu.edu ... Parsons (1992),Mauer and Triantis (1994), Mello, Parsons and Triantis (1995), Fries, Miller and ...
The traditional commercial mortgage contract is written without recourse to any other borrower as... more The traditional commercial mortgage contract is written without recourse to any other borrower assets except the subject property. For credit enhancement purposes, many lenders/investors are today seeking access to additional collateral through recourse or cross-default clauses. This paper considers the contracting value of such clauses. To measure these values and assess other related risk statistics, we apply a contingent-claims approach in which borrowers rationally default when the value of the mortgage meets or exceeds the value of the collateral, where collateral value includes additional assets provided through the mortgage contract. In the case of recourse to an unencumbered asset, default risk is reduced in part simply because additional collateral is available. In addition, when the subject property and additional collateral are less than perfectly correlated, diversification benefits are apparent. In the case of the cross-default clause -which means that default on one loan constitutes default on all loans covered by the clause -risk management benefits are also found to be substantial. For example, default risk resulting from a two-asset cross-default clause arrangement can be reduced by over 50 percent of non-recourse default risk when asset values are uncorrelated. JEL classification." C61; G13; G21; G32
Journal of Real Estate Finance and Economics, 1997
Empirical studies of bond and commercial mortgage performance often quantify a required risk prem... more Empirical studies of bond and commercial mortgage performance often quantify a required risk premium by examining the difference between the promised yield and the realized yield as adjusted for default occurrence. These studies omit the effects of various other sources of risk, however, including collateral asset market risk, interest rate risk, and possibly call risk. These omissions downwardly bias the
... David C. Mauer Edwin L. Cox School of Business Southern Methodist University PO Box 750333 Da... more ... David C. Mauer Edwin L. Cox School of Business Southern Methodist University PO Box 750333 Dallas, TX 75275-0333 phone: (214) 768-4150 email: dmauer@mail.cox.smu.edu ... Parsons (1992),Mauer and Triantis (1994), Mello, Parsons and Triantis (1995), Fries, Miller and ...
... tent of dividend change announcements by REITs is studied to capture the effects of divi ... ... more ... tent of dividend change announcements by REITs is studied to capture the effects of divi ... from 1982 through 1988 and divided into pre-and post-1986 Tax Reform Act subperiods. ... with continuing short-term bor-rowings through the development of improved banking relationships ...
This paper explores the implications of noise in real estate markets by examining two application... more This paper explores the implications of noise in real estate markets by examining two applications that focus on real option valuation and optimal exercise policy. The first application examines an imperfectly competitive market for real estate development in which agents compete over the timing of lead investment. Information spillover and free- rider incentives are shown to cause significant delay in lead investment. Delay together with competitive response once pioneering development has occurred explains observed patterns of development in blighted urban land markets and for large-scale multi-stage development projects. The second application examines valuation and default exercise policy of risky coupon debt that is secured by a lease-encumbered noisy real asset. Our main result is that, relative to the noiseless case, the borrower will generally delay default exercise until the noisy signal of asset value is far into-the-money. This finding provides an information-based explan...
We study the valuation of illiquid real assets as well as claims written on illiquid real assets.... more We study the valuation of illiquid real assets as well as claims written on illiquid real assets. In our model noise mean reverts such that observed asset values cointegrate with the unobserved full information asset value. The optimal value estimate is shown to have three time-weighted terms: a forward value estimate, a term that is based on the time series of observed values in combination with previously determined conditional expected values, and a term that corrects for convexity effects due to incomplete information. The conditional dynamics of the value estimate are shown to differ from the dynamics in the full information asset value only in the arrival rate of information. Changexhcv in the arrival rate of information is shown to impact contingent-claim value and option exercise policy. Forward values and optimal backdating rules are also determined. Our results relate to and extend previous research on illiquid asset markets, including work on optimal value estimation, exc...
This paper explores the implications of noise in real estate markets by examining two application... more This paper explores the implications of noise in real estate markets by examining two applications that focus on real option valuation and optimal exercise policy. The first application examines an imperfectly competitive market for real estate development in which agents compete over the timing of lead investment. Information spillover and free- rider incentives are shown to cause significant delay in lead investment. Delay together with competitive response once pioneering development has occurred explains observed patterns of development in blighted urban land markets and for large-scale multi-stage development projects. The second application examines valuation and default exercise policy of risky coupon debt that is secured by a lease-encumbered noisy real asset. Our main result is that, relative to the noiseless case, the borrower will generally delay default exercise until the noisy signal of asset value is far into-the-money. This finding provides an information-based explan...
Real Estate Economics, 2002
Real Estate Economics, 2002
We study the optimal valuation of real assets when true asset values are unobservable. In our mod... more We study the optimal valuation of real assets when true asset values are unobservable. In our model, the observed value cointegrates with the unobserved true asset value to cause serial correlation in the time series of observed values. Autocorrelation as well as total variance in the observed value are used to calculate an efficient unbiased estimate of the true asset value (the time-filtered value). The optimal value estimate is shown to have three time-weighted terms: a deterministic forward value, a comparison of observed values with previously determined time-filtered values, and a convexity correction for incomplete information. The residual variance measures the precision of the value estimate, which can increase or decrease monotonically over time as well as display a linear or nonlinear time trend. We also show how to revise time-filtered estimates based on the arrival of new information. Our results relate to work on illiquid asset markets, including appraisal smoothing, tests of market efficiency, and the valuation of options on real assets.
Abstract This paper examines the relationship between uncertainty and investment in the context o... more Abstract This paper examines the relationship between uncertainty and investment in the context of the real options model. Specifically, we analyze the role of built property value volatility in determining the rate of commercial real estate construction. To focus on the ...
Real Estate Economics, 2000
Neoclassical investment decision criteria suggest that only the systematic component of total unc... more Neoclassical investment decision criteria suggest that only the systematic component of total uncertainty affects the rate of investment, as channeled through built asset price. Alternatively, option-based investment models suggest a direct role for total uncertainty in investment decision making. To sort out uncertainty's role in investment, we specify and empirically estimate a structural model of asset market equilibrium. Commercial real estate time series data with two distinct measures of asset price and uncertainty are used to assess the competing investment models. Empirical results generally favor predictions of the option-based model, and hence suggest that irreversibility and delay are important considerations to investors. Our findings also have implications for macroeconomic policy and for forecasts of cyclical investment activity.
Managerial and Decision Economics, 1996
The Journal of Real Estate Finance and Economics, 2012
Land developers in select economic environments have been found to build in large increments and ... more Land developers in select economic environments have been found to build in large increments and hold substantial amounts of inventory despite their ability to mitigate risk by phasing the production of residential lots. Such behavior was observed in numerous metropolitan areas throughout the southeastern and southwestern United States in the years leading up to financial crises, resulting in inventories of tens of thousands of lots in cities such as Atlanta, Las Vegas and Orlando, just to name a few. The model presented in this paper explores the rationale behind the choices made by developers in these markets and others by extending the real options framework to concurrently estimate optimal phasing and inventory decisions for large-scale residential development projects. Modeled interactions between several variables indicate that full development, smooth phased development and lumpy development can all be optimal under different market conditions, with each pattern feeding back into inventory levels and lot pricing.
The Journal of Real Estate Finance and Economics, 2008
We model and examine the financial aspects of the land development process incorporating the indu... more We model and examine the financial aspects of the land development process incorporating the industry practice of preselling lots to builders through the use of option contracts as a risk management technique. Using contingent claims valuation, we are able to determine endogenously the land value, presale option value, credits spreads and the effects of presales on debt pricing and equity expected returns. We show that using presales options effectively shift market risk from the land developer to the builder. Results from the model are consistent with the high rates of return on equity observed in empirical surveys; they also suggest that developers may be justified in pursuing projects with substantially lower expected returns to equity when a large number of lots can be presold. Additionally, we show that presales reduce default risk dramatically for leveraged projects and can support a considerable reduction in the cost of construction financing. Large debt risk premiums are justified for highly levered projects, which helps explain the use of mezzanine financing in the land development industry to reduce expected default costs.
... Applications involving discount debt, levered lease transactions with coupon debt financing, ... more ... Applications involving discount debt, levered lease transactions with coupon debt financing, and imperfect competition in new product markets with ... University of Kentucky ( email ) College of Business & Economics Lexington, KY 40506-0034 United States 606-257-2490 (Phone ...
Financial Management, Feb 1, 2001
This paper studies the effects of noise on contingent-claim values, option exercise policies and ... more This paper studies the effects of noise on contingent-claim values, option exercise policies and the incentives to acquire information to improve irreversible exercise decisions. We determine distributional parameters for the conditional expected asset value in which the noise and the underlying asset value dynamics follow normal, lognormal and mean-reverting processes. Option prices are found to depend on the revealed variance of asset price, suggesting that only information that can be acted upon are useful in formulating option exercise policy.
... David C. Mauer Edwin L. Cox School of Business Southern Methodist University PO Box 750333 Da... more ... David C. Mauer Edwin L. Cox School of Business Southern Methodist University PO Box 750333 Dallas, TX 75275-0333 phone: (214) 768-4150 email: dmauer@mail.cox.smu.edu ... Parsons (1992),Mauer and Triantis (1994), Mello, Parsons and Triantis (1995), Fries, Miller and ...
The traditional commercial mortgage contract is written without recourse to any other borrower as... more The traditional commercial mortgage contract is written without recourse to any other borrower assets except the subject property. For credit enhancement purposes, many lenders/investors are today seeking access to additional collateral through recourse or cross-default clauses. This paper considers the contracting value of such clauses. To measure these values and assess other related risk statistics, we apply a contingent-claims approach in which borrowers rationally default when the value of the mortgage meets or exceeds the value of the collateral, where collateral value includes additional assets provided through the mortgage contract. In the case of recourse to an unencumbered asset, default risk is reduced in part simply because additional collateral is available. In addition, when the subject property and additional collateral are less than perfectly correlated, diversification benefits are apparent. In the case of the cross-default clause -which means that default on one loan constitutes default on all loans covered by the clause -risk management benefits are also found to be substantial. For example, default risk resulting from a two-asset cross-default clause arrangement can be reduced by over 50 percent of non-recourse default risk when asset values are uncorrelated. JEL classification." C61; G13; G21; G32
Journal of Real Estate Finance and Economics, 1997
Empirical studies of bond and commercial mortgage performance often quantify a required risk prem... more Empirical studies of bond and commercial mortgage performance often quantify a required risk premium by examining the difference between the promised yield and the realized yield as adjusted for default occurrence. These studies omit the effects of various other sources of risk, however, including collateral asset market risk, interest rate risk, and possibly call risk. These omissions downwardly bias the
... David C. Mauer Edwin L. Cox School of Business Southern Methodist University PO Box 750333 Da... more ... David C. Mauer Edwin L. Cox School of Business Southern Methodist University PO Box 750333 Dallas, TX 75275-0333 phone: (214) 768-4150 email: dmauer@mail.cox.smu.edu ... Parsons (1992),Mauer and Triantis (1994), Mello, Parsons and Triantis (1995), Fries, Miller and ...
... tent of dividend change announcements by REITs is studied to capture the effects of divi ... ... more ... tent of dividend change announcements by REITs is studied to capture the effects of divi ... from 1982 through 1988 and divided into pre-and post-1986 Tax Reform Act subperiods. ... with continuing short-term bor-rowings through the development of improved banking relationships ...
This paper explores the implications of noise in real estate markets by examining two application... more This paper explores the implications of noise in real estate markets by examining two applications that focus on real option valuation and optimal exercise policy. The first application examines an imperfectly competitive market for real estate development in which agents compete over the timing of lead investment. Information spillover and free- rider incentives are shown to cause significant delay in lead investment. Delay together with competitive response once pioneering development has occurred explains observed patterns of development in blighted urban land markets and for large-scale multi-stage development projects. The second application examines valuation and default exercise policy of risky coupon debt that is secured by a lease-encumbered noisy real asset. Our main result is that, relative to the noiseless case, the borrower will generally delay default exercise until the noisy signal of asset value is far into-the-money. This finding provides an information-based explan...
We study the valuation of illiquid real assets as well as claims written on illiquid real assets.... more We study the valuation of illiquid real assets as well as claims written on illiquid real assets. In our model noise mean reverts such that observed asset values cointegrate with the unobserved full information asset value. The optimal value estimate is shown to have three time-weighted terms: a forward value estimate, a term that is based on the time series of observed values in combination with previously determined conditional expected values, and a term that corrects for convexity effects due to incomplete information. The conditional dynamics of the value estimate are shown to differ from the dynamics in the full information asset value only in the arrival rate of information. Changexhcv in the arrival rate of information is shown to impact contingent-claim value and option exercise policy. Forward values and optimal backdating rules are also determined. Our results relate to and extend previous research on illiquid asset markets, including work on optimal value estimation, exc...
This paper explores the implications of noise in real estate markets by examining two application... more This paper explores the implications of noise in real estate markets by examining two applications that focus on real option valuation and optimal exercise policy. The first application examines an imperfectly competitive market for real estate development in which agents compete over the timing of lead investment. Information spillover and free- rider incentives are shown to cause significant delay in lead investment. Delay together with competitive response once pioneering development has occurred explains observed patterns of development in blighted urban land markets and for large-scale multi-stage development projects. The second application examines valuation and default exercise policy of risky coupon debt that is secured by a lease-encumbered noisy real asset. Our main result is that, relative to the noiseless case, the borrower will generally delay default exercise until the noisy signal of asset value is far into-the-money. This finding provides an information-based explan...
Real Estate Economics, 2002
Real Estate Economics, 2002
We study the optimal valuation of real assets when true asset values are unobservable. In our mod... more We study the optimal valuation of real assets when true asset values are unobservable. In our model, the observed value cointegrates with the unobserved true asset value to cause serial correlation in the time series of observed values. Autocorrelation as well as total variance in the observed value are used to calculate an efficient unbiased estimate of the true asset value (the time-filtered value). The optimal value estimate is shown to have three time-weighted terms: a deterministic forward value, a comparison of observed values with previously determined time-filtered values, and a convexity correction for incomplete information. The residual variance measures the precision of the value estimate, which can increase or decrease monotonically over time as well as display a linear or nonlinear time trend. We also show how to revise time-filtered estimates based on the arrival of new information. Our results relate to work on illiquid asset markets, including appraisal smoothing, tests of market efficiency, and the valuation of options on real assets.