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Downside risk optimization in securitized real estate markets

Author

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  • Tim‐Alexander Kroencke
  • Felix Schindler

Abstract

Purpose - The purpose of this paper is to compare the risk and return characteristics as well as the allocation of mean‐variance (MV) and downside risk (DR) optimized portfolios of international real estate stock markets and to discuss implications for portfolio management. Design/methodology/approach - The analysis focuses on real estate markets only and examines the appropriateness of the Markowitz approach based on MV optimization in comparison to the DR framework suggested by Estrada. Therefore, the two frameworks are presented before the properties of the return distributions are analyzed. Afterwards, the risk and return characteristics as well as the allocation of the efficient portfolios in both frameworks and the divergences are analyzed. Findings - Because of non‐normally distributed returns, negative skewness, and probably non‐quadratic utility functions of investors, MV optimization is not appropriate and the alternative approach by Estrada has its merit compared with other DR frameworks. Furthermore, MV‐efficient and DR‐efficient portfolio allocation differ, as shown by a similarity index. Summarizing, MV optimization is inherent with misleading results and DR optimization shows stronger out‐of‐sample performance – at least during time periods characterized by high market volatility and financial market turmoil. Originality/value - This study provides some interesting and valuable insights into the DR of international securitized real estate portfolios and the limitations for portfolio management based on MV optimization.

Suggested Citation

  • Tim‐Alexander Kroencke & Felix Schindler, 2010. "Downside risk optimization in securitized real estate markets," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 28(6), pages 434-453, September.
    • Handle: RePEc:eme:jpifpp:v:28:y:2010:i:6:p:434-453
    DOI: 10.1108/14635781011080294
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    Citations

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    Cited by:

    1. Ayub, Usman & Shah, Syed Zulfiqar Ali & Abbas, Qaisar, 2015. "Robust analysis for downside risk in portfolio management for a volatile stock market," Economic Modelling, Elsevier, vol. 44(C), pages 86-96.
    2. Morano, Pierluigi & Tajani, Francesco, 2018. "Saving soil and financial feasibility. A model to support public-private partnerships in the regeneration of abandoned areas," Land Use Policy, Elsevier, vol. 73(C), pages 40-48.
    3. Refk Selmi, 2023. "Do investors care about carbon risk? The impact of the Paris agreement on the inflation hedging performance of commodities," Economics Bulletin, AccessEcon, vol. 43(2), pages 1111-1121.

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