The contribution of finance and behavioural theory to understanding the performance of the Shanghai office property market 1995-2004

• Main Author: Ye, Xu
• Published: Oxford Brookes University 2008
• Subjects: 337
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.490519

The term 'diversification' lies at the centre of any investment decision, and Harry Markowitz formally introduced portfolio theory to quantify risks in 1950s. His successors developed Capital Asset Pricing Model (CAPM) to price investments, which later became one of the cornerstones of traditional finance. Approximately fifty years later, the validity of the model has been under debate, and researchers are now examining how the behaviour of investors could influence returns. This thesis starts with a brief review of the development of traditional finance and critically assesses both the historical and current status of CAPM in decision- making. It also discusses the difficulties of applying CAPM in the property market, such as the paucity of data in emerging property markets, and the gaps in existing studies. In addition, existing behavioural studies have been mainly based on western samples, while neglected the Easterners, such as Chinese investors. After four years' intensive study and research, this thesis offers a fuller understanding of the perfonnance of the Shanghai office market by combining both financial and behavioural theory approaches. Despite the difficulties of accessing relevant archival data, this thesis examines the reliability of CAPM in the Shanghai office market using datasets from three property companies individually. To explain the regression results concerning the reliability of CAPM, this thesis further employs a questionnaire survey to evaluate Chinese property professionals' decision-making process. These are compared with their UK counterparts, in an effort to examine the impact of different cultural backgrounds on professionals' judgement / decisions. For the behaviour among Chinese property professionals, further studies are conducted to evaluate the influence of gender, age, educational background and years of working in the property industry on Chinese respondents' judgement. The empirical results from this thesis suggest that if the market is in recovery, prospective investors might need to incorporate existing investors' sentiment into their decisions. The failing of CAPM in the recovering Shanghai prime office market is· partly because the rational assumption of CAPM seems to be flawed during this stage of the market. More specifically, Chinese property professionals 1) tend to make errors in their judgement, 2) appear to be overconfident about their forecasting skills and 3) behave in a risk seeking manner when the market is in the early recovery stage, or the options have a 25% or lower probability of receiving capital gains. This behaviour could be linked to the Confucian belief of Chinese people, which may make them optimistic and overconfident about their capabilities, so as to underestimate risks. However, the hannony belief of Confucianism may also lead them to withdraw capital from the market too early before their utilities are fully maximised after being in the recovery market for a few years. Furthennore, once the market is in early recession or when investors are making decisions concerning options having a 90% or higher probability of producing capital losses, although Chinese property professionals behaved in a risk-seeking manner again, the Daoist belief tends to lead them to seek possible ways to fully compensate the risks. \Vhen the market is reaching close to the bottom, or when investors are making decisions between options having a 25% or lower probability of producing capital losses, Chinese property professionals seem to behave in a less risk seeking way. Therefore, investors could have more confidence in CAPM to detennine their investment decisions when the Shanghai prime office market is declining.