Limits to Diversification: Tail Risks in Real Estate Portfolios

29 Pages Posted: 30 May 2015 Last revised: 16 Nov 2015

Michael Stein

University of Duisburg-Essen

Date Written: May 29, 2015


This study addresses real estate's riskiness from a distributional viewpoint. Several studies have found real estate returns to be best modeled with stable paretian distributions. Using NCREIF individual property returns this is confirmed, but the first application of stable distributions to real estate portfolio returns provides evidence that diversification effects ultimately reduce the tailedness and surprisingly drive the tail parameter towards normality. The study further contributes to the literature by showing the importance of a complete view, beyond pure tail parameter considerations. Even in the presence of tail parameters being close to normal, the return risk may still be tremendous, and can only be reduced by diversification effects in property portfolios, and only to a certain time-dependent extent. The results have strong implications for risk managers, fund managers and holders of large commercial real estate portfolios alike.

Keywords: Real Estate Return Distributions, Stable Distributions, Tail Dependence, Portfolio, Diversification

JEL Classification: G00, G11, C00

Suggested Citation

Stein, Michael, Limits to Diversification: Tail Risks in Real Estate Portfolios (May 29, 2015). Available at SSRN: or

Michael Stein (Contact Author)

University of Duisburg-Essen ( email )

Universitätsst. 12
Duisburg, 45117


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