Recovery of Real Estate Returns for Portfolio Allocation

Posted: 2 Nov 1999

Abstract

Appraisal-based return indexes may not approximate the "true" real estate return distributions because of understated return volatility. Recovery of returns from reported, appraisal-based returns may be possible by evoking models to correct for appraisal-based smoothing of the second moment. Because recovery intentionally alters the volatility of the reported return distribution and the correlations among assets in the portfolio, the weights to real estate are likely affected. Our examination of the portfolio implications of altering the return distribution indicates that weights may be quite sensitive to the effects of recovery across a reasonable range of correlation regimes. A comparative analysis of several recover models reveals that all models achieve the objective of inflating the volatility of reported returns. However, the models also change the mean of the return distribution which either counteracts of magnifies the effect of the volatility change on allocations. These findings bring into question the applicability of recovery models in their current form.

JEL Classification: G12, R31

Suggested Citation

Corgel, John B. and de Roos, Jan A., Recovery of Real Estate Returns for Portfolio Allocation. The Journal of Real Estate Finance and Economics, Vol. 18, No. 3, May 1999. Available at SSRN: https://ssrn.com/abstract=181349

John B. Corgel (Contact Author)

Cornell University ( email )

School of Hotel Administration
Ithaca, NY 14853
United States
607-255-4305 (Phone)
607-255-4179 (Fax)

Jan A. De Roos

Cornell University ( email )

School of Hotel Administration
Ithaca, NY 14853
United States
607-255-4305 (Phone)
607-255-4179 (Fax)

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