International Diversification with Securitized Real Estate and the Veiling Glare from Currency Risk

38 Pages Posted: 19 Feb 2011

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: February 1, 2011

Abstract

This paper analyzes diversification benefits from international securitized real estate in a mixed-asset context. We apply regression-based mean-variance efficiency tests, conditional on currency-unhedged and fully hedged portfolios to account for foreign exchange risk exposure. From the perspective of a US investor, it is shown that first, international diversification is superior to a US mixed-asset portfolio, second, adding international real estate to an already internationally diversified stock and bond portfolio results in a further significant improvement of the risk-return trade-off and, third, considering unhedged international assets could lead to biased asset allocation decisions not realizing the true diversification benefits from international assets. Our in-sample results are quite robust in out-of-sample analysis and when investment frictions like short selling constraints are introduced.

Keywords: Diversification Benefits, International Mixed-Asset Portfolios, Currency Hedging, Spanning Tests, Short Selling Constraints

JEL Classification: G11, G12, G15

Suggested Citation

Kroencke, Tim Alexander and Schindler, Felix, International Diversification with Securitized Real Estate and the Veiling Glare from Currency Risk (February 1, 2011). ZEW - Centre for European Economic Research Discussion Paper No. 11-012. Available at SSRN: https://ssrn.com/abstract=1763268 or http://dx.doi.org/10.2139/ssrn.1763268

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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