Thrift Asset-Class Returns and the Efficient Diversification of Thrift Institution Portfolios

27 Pages Posted: 18 Jul 2001 Last revised: 18 Nov 2008

See all articles by Rebel A. Cole

Rebel A. Cole

Florida Atlantic University

Joseph McKenzie

Government of the United States of America - Federal Housing Finance Board (FHFB)

Abstract

We estimate quarterly return series from March 1984 through December 1989 for ten classes of thrift assets using the statistical cost accounting methodology of Hester and Zoellner (1966). We then use these return series to estimate mean-variance efficient frontiers for all thrifts, for thrifts that were well-capitalized two years earlier, and for thrifts that were insolvent two years earlier. Our results show that neither the asset restrictions existing before nor those in effect after passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 would have prevented thrifts from reaching most of the portfolios along the efficient frontier. The actual portfolio chosen by well capitalized thrifts is close to the estimated efficient frontier, while the actual portfolio chosen by insolvent thrifts is located far from the frontier in the high-risk end of investment space. These findings, coupled with the high proportion of nontraditional assets in the actual portfolio chosen by insolvent thrifts, support the hypothesis that moral hazard induced thrifts to take on investments that were excessively risky from the deposit insurer's point of view.

JEL Classification: G21, G28

Suggested Citation

Cole, Rebel A. and McKenzie, Joseph, Thrift Asset-Class Returns and the Efficient Diversification of Thrift Institution Portfolios. Journal of the American Real Estate and Urban Economics Association, Vol. 22 No. 1, Winter 1994. Available at SSRN: https://ssrn.com/abstract=5636

Rebel A. Cole (Contact Author)

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

Joseph McKenzie

Government of the United States of America - Federal Housing Finance Board (FHFB) ( email )

1700 G St., NW
Washington, DC 20006
United States

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