Cornish-Fisher Expansion for Commercial Real Estate Value at Risk

Posted: 9 Apr 2015

See all articles by Charles-Olivier Amédée-Manesme

Charles-Olivier Amédée-Manesme

Laval University - Business School

Fabrice Barthelemy


Donald C. Keenan

University of Georgia; University of Cergy-Pontoise

Date Written: April 7, 2015


The computation of Value at Risk has traditionally been a troublesome issue in commercial real estate. Difficulties mainly arise from the lack of appropriate data, the non-normality of returns, and the inapplicability of many of the traditional methodologies. As a result, calculation of this risk measure has rarely been done in the real estate field. However, following a spate of new regulations such as Basel II, Basel III, NAIC and Solvency II, financial institutions have increasingly been required to estimate and control their exposure to market risk. As a result, financial institutions now commonly use "internal" Value at Risk (VaR) models in order to assess their market risk exposure. The purpose of this paper is to estimate distribution functions of real estate VaR while taking into account non-normality in the distribution of returns. This is accomplished by the combination of the Cornish-Fisher expansion expansion with a certain rearrangement procedure. We demonstrate that this combination allows superior estimation, and thus a better VaR estimate, than has previously been obtainable. We also show how the use of a rearrangement procedure solves well-known issues arising from the monotonicity assumption required for the Cornish-Fisher expansion to be applicable, a difficulty which has previously limited the useful of this expansion technique. Thus, practitioners can find a methodology here to quickly assess Value at Risk without suffering loss of relevancy due to any non-normality in their actual return distribution. The originality of this paper lies in our particular combination of Cornish-Fisher expansions and the rearrangement procedure.

Keywords: Value at risk; Risk measurement; Real estate finance; Cornish-Fisher expansion; Risk management; Rearrangement procedures

Suggested Citation

Amédée-Manesme, Charles-Olivier and Barthelemy, Fabrice and Keenan, Donald C. and Keenan, Donald C., Cornish-Fisher Expansion for Commercial Real Estate Value at Risk (April 7, 2015). Journal of Real Estate Finance and Economics, Vol. 50, No. 4, 2015, Available at SSRN:

Charles-Olivier Amédée-Manesme (Contact Author)

Laval University - Business School ( email )

2325 rue de la Terrasse
local 3652
Québec, Quebec G1V0A6

Fabrice Barthelemy

Independent ( email )

Donald C. Keenan

University of Georgia ( email )

510 Brooks Hall
Athens, GA 30602
United States
706-542-3668 (Phone)

University of Cergy-Pontoise ( email )

33 Boulevard du Port
Cergy-Pontoise Cedex, Cedex 95011

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