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

45 Pages Posted: 1 Dec 2009

See all articles by Massimo Guidolin

Massimo Guidolin

Bocconi University - Department of Finance

Carolina Fugazza

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

Giovanna Nicodano

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

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Date Written: August 27, 2009

Abstract

Welfare gains to long-horizon investors may derive from time diversification that exploits non-zero intemporal 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.

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

Suggested Citation

Guidolin, Massimo and Fugazza, Carolina and Nicodano, Giovanna, Time and Risk Diversification in Real Estate Investments: Assessing the Ex Post Economic Value (August 27, 2009). Manchester Business School Research Paper No. 581, Available at SSRN: https://ssrn.com/abstract=1514451

Massimo Guidolin (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Carolina Fugazza

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

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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