Real Estate Portfolio Management : Optimization under Risk Aversion
AbstractThis paper deals with real estate portfolio optimization when investors are risk averse. In this framework, we determine several types of optimal times to sell a diversified real estate and analyze their properties. The optimization problem corresponds to the maximization of a concave utility function defined on the terminal value of the portfolio. We extend previous results (Baroni et al., 2007, and Barthélémy and Prigent, 2009), established for the quasi linear utility case, where investors are risk neutral. We consider four cases. In the first one, the investor knows the probability distribution of the real estate index. In the second one, the investor is perfectly informed about the real estate market dynamics. In the third case, the investor uses an intertemporal optimization approach which looks like an American option problem. Finally, the buy-and-hold strategy is considered. For these four cases we analyze numerically the solutions that we compare with those of the quasi linear case. We show that the introduction of risk aversion allows to better take account of the real estate market volatility. We also introduce the notion of compensating variation to better compare all these solutions.
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Bibliographic InfoPaper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2011-12.
Date of creation: 2011
Date of revision:
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Real estate portfolio; Optimal holding period; Risk aversion; Real estate market volatility;
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-09 (All new papers)
- NEP-UPT-2011-08-09 (Utility Models & Prospect Theory)
- NEP-URE-2011-08-09 (Urban & Real Estate Economics)
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