The Predictability of International Real Estate Markets, Exchange Rate Risks and Diversification Consequences
53 Pages Posted: 11 Nov 2008
Date Written: December 1996
We investigate whether international real estate related securities offer any incremental diversification benefits over foreign stocks using mean-variance analysis together with a multifactor latent variable model. The study finds that diversification benefits are primarily driven by unanticipated returns which in turn are partly driven by changes in exchange rate risk. Although exchange rate risk accounts for a larger portion of the return fluctuation in real estate related securities relative to common stocks, international real estate securities are found to provide some incremental diversification benefits over common stocks even if currency risks are hedged.
Keywords: Predictability, Diversification, International Property Trusts
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