Simulating Real Estate in the Investment Portfolio: Model Uncertainty and Inflation Hedging

39 Pages Posted: 8 Mar 2006  

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Eduardas Valaitis

American University

Date Written: March 8, 2006

Abstract

Real estate is regarded as an inflation hedge, however the autocorrelation of property return indices and the autocorrelation of changes in the CPI pose serious problems of inference. In this paper we address these problems in two ways. First, we use robust methods to test of changes in the relationship between property returns and inflation. Second, we perform simulations of sample investment portfolios using vector autoregressions to study the ability of commercial and residential housing to hedge inflation. Despite the relatively short sample period available, we find that property is likely to hedge inflation well.

Keywords: Real Estate, Finance, Investment

JEL Classification: R3

Suggested Citation

Goetzmann, William N. and Valaitis, Eduardas, Simulating Real Estate in the Investment Portfolio: Model Uncertainty and Inflation Hedging (March 8, 2006). Yale ICF Working Paper No. 06-04. Available at SSRN: https://ssrn.com/abstract=889081

William N. Goetzmann (Contact Author)

Yale School of Management - International Center for Finance ( email )

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Eduardas Valaitis

American University ( email )

Washington, DC 20016
United States

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