Potential Diversification Benefits in the Presence of Unknown Structural Breaks: An Australian Case Study

12 Pages Posted: 30 Oct 2003

See all articles by Patrick J. Wilson

Patrick J. Wilson

University of Technology Sydney (UTS) - School of Finance and Economics

Richard H. Gerlach

University of Sydney

Ralf Zurbruegg

University of Adelaide; Financial Research Network (FIRN)

Abstract

It is reasonable to suggest that a portfolio manager with direct property diversified by sector or region is more interested in strategic than in tactical asset allocation. However, even with strategic allocations of property the portfolio manager needs a regular monitoring of the inter-relationships amongst assets comprising the portfolio to ensure that unexpected events do not 'permanently' alter such relationships. One procedure for ascertaining whether assets are inter-related over the long run (and therefore offer few diversification benefits) is through cointegration analysis. A difficulty with conventional cointegration analysis, however, is that it is unable to accommodate changes in equilibrium relationships that might occur due to unexpected structural changes. In this paper we apply the Gregory and Hansen cointegration procedure to consider how unexpected structural changes might affect the potential long run diversification benefits of assets held in an Australian property portfolio.

Suggested Citation

Wilson, Patrick J. and Gerlach, Richard H. and Zurbruegg, Ralf, Potential Diversification Benefits in the Presence of Unknown Structural Breaks: An Australian Case Study. Australian Economic Papers, Vol. 42, pp. 442-453, December 2003. Available at SSRN: https://ssrn.com/abstract=461806

Patrick J. Wilson (Contact Author)

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
61 2 9514 7777 (Phone)
61 2 9514 7711 (Fax)

Richard H. Gerlach

University of Sydney ( email )

Room 483, Building H04
University of Sydney
Sydney, NSW 2006
Australia
+ 612 9351 3944 (Phone)
+ 612 9351 6409 (Fax)

HOME PAGE: http://www.econ.usyd.edu.au/staff/richardg

Ralf Zurbruegg

University of Adelaide ( email )

233 North Terrace
Department of Finance
Adelaide SA 5005
Australia
+61 8 8303 5535 (Phone)
+61 8 8303 4368 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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