Downside Risk Optimization in Securitized Real Estate Markets

33 Pages Posted: 9 Jun 2010

See all articles by Tim Alexander Kroencke

Tim Alexander Kroencke

University of Neuchatel - Institute of Financial Analysis

Felix Schindler

Steinbeis University Berlin - Center for Real Estate Studies; ZEW – Leibniz Centre for European Economic Research - International Finance and Financial Management

Date Written: 2010

Abstract

Optimization of international securitized real estate portfolios has been a key topic for several decades. However, most previous analysis has focused on regional diversification by applying the traditional mean-variance (MV) framework suggested by Markowitz (1952) even if the limitations of this approach are well-known. Thus, we focus on a more suitable and appealing downside risk (DR) framework suggested by Estrada (2008), which applies a similar optimization algorithm as the MV framework. The analysis covers the eight largest securitized real estate markets from January 1990 to December 2009 and thus captures a more global perspective. The main findings are as follows: first, the return distributions are non-normally distributed and negatively skewed. Second, optimal portfolio weights differ substantially between the MV and DR approach. Third, portfolio weights are shifted from the U.S. and Australian market to the Dutch and the French market when applying the DR framework instead of the MV framework. Fourth, the dominance of the DR framework is well-documented by comparing out-of-sample performance. The empirical results are remarkable and emphasize the practical merit of the presented DR framework for investors and portfolio managers.

Keywords: Downside Risk Analysis, International Real Estate Markets, Portfolio Management, Portfolio Optimization, Out-of-Sample Analysis

JEL Classification: C61, G11, G15

Suggested Citation

Kroencke, Tim Alexander and Schindler, Felix, Downside Risk Optimization in Securitized Real Estate Markets (2010). ZEW - Centre for European Economic Research Discussion Paper No. 10-034. Available at SSRN: https://ssrn.com/abstract=1622688 or http://dx.doi.org/10.2139/ssrn.1622688

Tim Alexander Kroencke (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland

Felix Schindler

Steinbeis University Berlin - Center for Real Estate Studies ( email )

Berlin
Germany

ZEW – Leibniz Centre for European Economic Research - International Finance and Financial Management ( email )

Postfach 103443
Mannheim, D-68034
Germany

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