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

41 Pages Posted: 13 Oct 2009

See all articles by Carolina Fugazza

Carolina Fugazza

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Center for Research on Pensions and Welfare Policies

Massimo Guidolin

Bocconi University - Department of Finance

Giovanna Nicodano

University of Turin - Department ESOMAS; Collegio Carlo Alberto; EGCI; Netspar

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Abstract

Welfare gains to long-horizon investors may derive from time diversification that exploits nonzero 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 article evaluates, ex post, the out-of-sample gains from diversification when equity real estate investment trusts (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 doubt on the value of time diversification.

Suggested Citation

Fugazza, Carolina and Guidolin, Massimo and Nicodano, Giovanna, Time and Risk Diversification in Real Estate Investments: Assessing the Ex Post Economic Value. Real Estate Economics, Vol. 37, Issue 3, pp. 341-381, Fall 2009, Available at SSRN: https://ssrn.com/abstract=1487842 or http://dx.doi.org/10.1111/j.1540-6229.2009.00245.x

Carolina Fugazza (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (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

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Giovanna Nicodano

University of Turin - Department ESOMAS ( email )

Turin, 10134
Italy

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano/

Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10121
Italy
390116705006 (Phone)

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

EGCI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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