Does the Diversification Potential of Securitized Real Estate Vary Over Time and Should Investors Care?

Posted: 22 Aug 2013

See all articles by Liang Peng

Liang Peng

Smeal College of Business, The Pennsylvania State University

Date Written: August 21, 2013

Abstract

This paper examines the dynamics of the covariance matrix of return rates for securitized real estate, other company stocks, and government bonds for a cross-section of eight countries. In-sample analysis establishes that in all countries the covariance matrix is time-varying and reacts stronger to bad than to good news. Using a realistic out-of-sample exercise, we find that portfolios selected with a forecasted dynamic covariance matrix are less risky than portfolios constructed with the static matrix. However, benefits of using the dynamic covariance matrix for active portfolio management are mostly offset by rebalancing cost. Passive buy-and-hold investors benefit, because the forecasted dynamic covariance matrix provides better risk assessment.

Keywords: Dynamic conditional correlation, Portfolio allocation, Forecast evaluation

JEL Classification: G11, G15, R33

Suggested Citation

Peng, Liang, Does the Diversification Potential of Securitized Real Estate Vary Over Time and Should Investors Care? (August 21, 2013). Journal of Real Estate Finance and Economics, Vol. 47, No. 2, 2013. Available at SSRN: https://ssrn.com/abstract=2313830

Liang Peng (Contact Author)

Smeal College of Business, The Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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