Diversification effect of real estate investment trusts: Comparing copula functions with kernel methods
Academic Article
Overview
Identity
Additional Document Info
Other
View All
Overview
abstract
Value at Risk estimated with joint distribution methodologies demonstrates that risk is lower for portfolios of real estate investment trusts (REITs) and smallbusiness equities compared with a single-asset holding. Benefits from diversification were largest in 2001-2003 and the smallest from 2006-2008. Previous research using Value at Risk points out the importance of model selection. Various estimation approaches affected results modestly over the entire period (1989-mid 2008). The Value at Risk is -3.1% for two copula models and -3.2% for a nonparametric empirical joint density, at a 1% probability level for weekly returns. After June 1996, the nonparametric copula model consistently returned the lowest risk estimate among the three joint distribution methods. Time-varying risk is a more important driver in the results than model specification. The highest portfolio risk was found for the period after August 2006 (weekly losses of 4.4% to 5%). The distribution-based model results were closer to the undiversified model results than in the earlier time periods, which supports the premise that contagion across asset classes characterises the post-2006 real estate bust, but is not a strong characteristic of the market over a longer investment horizon that includes growth phases of the business cycle. 2011 Taylor & Francis.