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Applying VaR to REITs: A comparison of alternative methods

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  • Lu, Chiuling
  • Wu, Sheng-Ching
  • Ho, Lan-Chih
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    Abstract

    This study employs five methods to calculate the VaR of twelve REITs portfolios and evaluates the accuracy of these methods. Firstly, we find that the VaR varies among individual portfolios. The Hotel REITs has consistently the largest VaR. The low-leveraging portfolio tends to have the largest VaR measured by the parametric methods, while the high leveraging portfolio has the largest VaR calculated by the non-parametric methods. Secondly, each method performs differently at different confidence levels, and no method dominates the others. At the 95% confidence level, the EWMA method performs relatively well. The EQWMA and the two non-parametric methods perform equivalently and slightly overestimate VaRs. The EQWMAT method ranks the bottom and significantly overestimates VaRs for all portfolios. At the 99% confidence level, the EQWMA method performs the best. The EQWMAT and the two non-parametric methods perform equivalently and may overestimate VaR for all portfolios. The EWMA method turns out to be the worst and tends to underestimate the VaR. These findings may provide more insights for institutional real estate investors.

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    File URL: http://www.sciencedirect.com/science/article/B6W61-4SDGR7J-2/2/77e2c069956011212a696de7d9f246dc
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    Bibliographic Info

    Article provided by Elsevier in its journal Review of Financial Economics.

    Volume (Year): 18 (2009)
    Issue (Month): 2 (April)
    Pages: 97-102

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    Handle: RePEc:eee:revfin:v:18:y:2009:i:2:p:97-102

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    Web page: http://www.elsevier.com/locate/inca/620170

    Related research

    Keywords: Value-at-Risk Real Estate Investment Trusts (REITs) Risk management;

    References

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    1. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
    2. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 39-69.
    3. Vlaar, Peter J. G., 2000. "Value at risk models for Dutch bond portfolios," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1131-1154, July.
    4. Chris Brooks & Gita Persand, 2000. "Value at Risk and Market Crashes," ICMA Centre Discussion Papers in Finance icma-dp2000-01, Henley Business School, Reading University.
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    Cited by:
    1. Jian Zhou & Randy Anderson, 2012. "Extreme Risk Measures for International REIT Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 152-170, June.
    2. Jian Zhou, 2013. "Extreme risk spillover among international REIT markets," Applied Financial Economics, Taylor & Francis Journals, vol. 23(2), pages 91-103, January.

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