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http://ssrn.com/abstract=1327461
 
 

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Time and Risk Diversification in Real Estate Investments: Assessing the Ex Post Economic Value


Carolina Fugazza


Università degli Studi di Milano-Bicocca - Department of Economics, Quantitative Methods and Business Strategies (DEMS); Center for Research on Pensions and Welfare Policies

Massimo Guidolin


Bocconi University - Department of Finance

Giovanna Nicodano


University of Turin - Department of Economics and Statistics; Collegio Carlo Alberto

January 13, 2009

Federal Reserve Bank of St. Louis Working Paper No. 2009-001A

Abstract:     
Welfare gains to long-horizon investors may derive from time diversification that exploits non-zero intertemporal return correlations associated with predictable returns. Real estate may thus become more desirable if its returns are negatively serially correlated. While it could be important for long horizon investors, time diversification has been mostly investigated in asset menus without real estate and focusing on in-sample experiments. This paper evaluates ex post, out-of-sample gains from diversification when E-REITs belong to the investment opportunity set. We find that diversification into REITs increases both the Sharpe ratio and the certainty equivalent of wealth for all investment horizons and for both Classical and Bayesian (who account for parameter uncertainty) investors. The increases in Sharpe ratios are often statistically significant. However, the out-of sample average Sharpe ratio and realized expected utility of long-horizon portfolios are frequently lower than that of a one-period portfolio, which casts doubts on the value of time diversification.

Number of Pages in PDF File: 35

Keywords: real time asset allocation, real estate, ex post performance, predictability, parameter uncertainty

JEL Classification: G11, L85

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Date posted: January 15, 2009  

Suggested Citation

Fugazza, Carolina and Guidolin, Massimo and Nicodano, Giovanna, Time and Risk Diversification in Real Estate Investments: Assessing the Ex Post Economic Value (January 13, 2009). Federal Reserve Bank of St. Louis Working Paper No. 2009-001A. Available at SSRN: http://ssrn.com/abstract=1327461 or http://dx.doi.org/10.2139/ssrn.1327461

Contact Information

Carolina Fugazza
University of Milan, Bicocca - Department of Economics, Quantitative Methods and Business Strategies (DEMS) ( email )
Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy
Center for Research on Pensions and Welfare Policies ( email )
Via Real Collegio, 30
Moncalieri, Turin - Piedmont 10124
Italy
Massimo Guidolin (Contact Author)
Bocconi University - Department of Finance ( email )
Via Roentgen 1
Milano, MI 20136
Italy
Giovanna Nicodano
University of Turin - Department of Economics and Statistics ( email )
Turin, 10134
Italy
HOME PAGE: http://www.carloalberto.org/people/faculty/fellows/nicodano/
Collegio Carlo Alberto ( email )
via Real Collegio 30
Moncalieri, Torino 10024
Italy
390116705006 (Phone)
HOME PAGE: http://www.carloalberto.org/people/nicodano/
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