Abstract

http://ssrn.com/abstract=2172299
 
 

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Market Risk of Real Estate: Using Indirect Data to Understand Direct Risks


Felix Schlumpf


Zurich Insurance Company Ltd

Genene Tessera


Zurich Insurance Company Ltd

Catalina Martínez Gutiérrez


Centre for Finance and Development - The Graduate Institute, Geneva; Zurich Insurance Compant Ltd

October 24, 2012

The Journal of Financial Perspectives, Forthcoming

Abstract:     
Even if the market capitalization of direct real estate is comparable to that of equities and fixed income, the data on direct real estate is very poor. It is, therefore, difficult to estimate the market risk of this important asset class. Moreover, risk systems from most vendors cover equities and fixed income, but do not cover direct real estate. We propose a simple methodology that uses widely available data on indirect real estate to estimate the market risk of direct real estate. In particular, we use data on Real Estate Investment Trusts (REITs) returns, determine their factor exposures to other asset classes and deleverage these exposures according to REITs’ balance sheets. We show that direct real estate can be considered as a portfolio of equities, fixed income and credit combined with idiosyncratic risk. We find that the existing direct indices understate the risk of the real estate market. In addition, with our methodology, the correlations to other asset classes become materially different and higher.

Number of Pages in PDF File: 10

Keywords: public and private real estate, real estate risk, mixed-asset diversification

JEL Classification: G11, G23, R33, C32

Accepted Paper Series


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Date posted: November 9, 2012 ; Last revised: December 6, 2013

Suggested Citation

Schlumpf, Felix and Tessera, Genene and Martínez Gutiérrez, Catalina, Market Risk of Real Estate: Using Indirect Data to Understand Direct Risks (October 24, 2012). The Journal of Financial Perspectives, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2172299 or http://dx.doi.org/10.2139/ssrn.2172299

Contact Information

Felix Schlumpf (Contact Author)
Zurich Insurance Company Ltd ( email )
Mythenquai 2
Zurich, CH-8022
Switzerland
HOME PAGE: http://www.zurich.com
Genene Tessera
Zurich Insurance Company Ltd ( email )
Mythenquai 2
Zurich CH-8022
Switzerland
HOME PAGE: http://www.zurich.com/
Catalina Martínez Gutiérrez
Centre for Finance and Development - The Graduate Institute, Geneva ( email )
Rue de Lausanne 132
P.O. Box 136
Geneva, 1211
Switzerland
Zurich Insurance Compant Ltd ( email )
Zurich, 8022
Switzerland
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