This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Investing for the long-run in European real estate

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Carolina Fugazza
Massimo Guidolin
Giovanna Nicodano

Additional information is available for the following registered author(s):

Abstract

We calculate optimal portfolio choices for a long-horizon, risk-averse investor who diversifies among European stocks, bonds, real estate, and cash, when excess asset returns are predictable. Simulations are performed for scenarios involving different risk aversion levels, horizons, and statistical models capturing predictability in risk premia. Importantly, under one of the scenarios, the investor takes into account the parameter uncertainty implied by the use of estimated coefficients to characterize predictability. We find that real estate ought to play a significant role in optimal portfolio choices, with weights between 12 and 44 percent. Under plausible assumptions, the welfare costs of either ignoring predictability or restricting portfolio choices to traditional financial assets only are found to be in the order of 150-300 basis points per year. These results are robust to changes in the benchmarks and in the statistical framework.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://research.stlouisfed.org/wp/2006/2006-028.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-028.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 2006
Date of revision:
Handle: RePEc:fip:fedlwp:2006-028

Contact details of provider:
Postal: P.O. Box 442, St. Louis, MO 63166
Fax: (314)444-8753
Web page: http://www.stlouisfed.org/
More information through EDIRC

Order Information:
Email:

For technical questions regarding this item, or to correct its listing, contact: (Diane Rosenberger).

Related research
Keywords: Real estate investment ; Rate of return ; European Union;

Other versions of this item:

This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November. [Downloadable!] (restricted)
  2. Vinod Chandrashekaran, 1999. "Time-Series Properties and Diversification Benefits of REIT Returns," Journal of Real Estate Research, American Real Estate Society, vol. 17(1), pages 91-112. [Downloadable!]
  3. Brennan, Michael J. & Schwartz, Eduardo S. & Lagnado, Ronald, 1997. "Strategic asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1377-1403, June. [Downloadable!] (restricted)
  4. Pelizzon, Loriana & Weber, Guglielmo, 2003. "Are Household Portfolios Efficient? An Analysis Conditional on Housing," CEPR Discussion Papers 3890, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Massimo Guidolin & Allan Timmermann, 2005. "Economic Implications of Bull and Bear Regimes in UK Stock and Bond Returns," Economic Journal, Royal Economic Society, vol. 115(500), pages 111-143, 01. [Downloadable!] (restricted)
  6. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02. [Downloadable!] (restricted)
  7. Campbell, John Y. & Chan, Yeung Lewis & Viceira, Luis M., 2003. "A multivariate model of strategic asset allocation," Journal of Financial Economics, Elsevier, vol. 67(1), pages 41-80, January. [Downloadable!] (restricted)
    Other versions:
  8. Guidolin, Massimo & Timmermann, Allan, 2006. "Term structure of risk under alternative econometric specifications," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 285-308. [Downloadable!] (restricted)
    Other versions:
  9. John Y. Campbell & Luis Viceira, 2005. "The Term Structure of the Risk-Return Tradeoff," NBER Working Papers 11119, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Michael W. Brandt, 1999. "Estimating Portfolio and Consumption Choice: A Conditional Euler Equations Approach," Journal of Finance, American Finance Association, vol. 54(5), pages 1609-1645, October. [Downloadable!] (restricted)
  11. John Y. Campbell & Luis M. Viceira, 1999. "Consumption And Portfolio Decisions When Expected Returns Are Time Varying," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 433-495, May. [Downloadable!] (restricted)
    Other versions:
  12. Yuming Li & Ko Wang, 1995. "The Predictability of REIT Returns and Market Segmentatio," Journal of Real Estate Research, American Real Estate Society, vol. 10(4), pages 471-482. [Downloadable!]
  13. Balduzzi, Pierluigi & Lynch, Anthony W., 1999. "Transaction costs and predictability: some utility cost calculations," Journal of Financial Economics, Elsevier, vol. 52(1), pages 47-78, April. [Downloadable!] (restricted)
  14. Raimond Maurer & Frank Reiner & Steffen Sebastian, 2004. "Characteristics of German Real Estate Return Distributions: Evidence from Germany and Comparison to the U.S. and U.K," Working Paper Series: Finance and Accounting 108, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
  15. Campbell, John Y & Shiller, Robert J, 1988. " Stock Prices, Earnings, and Expected Dividends," Journal of Finance, American Finance Association, vol. 43(3), pages 661-76, July. [Downloadable!] (restricted)
    Other versions:
  16. de Roon, Frans & Eichholtz, Piet & Koedijk, Kees, 2002. "The Portfolio Implications of Home Ownership," CEPR Discussion Papers 3501, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  17. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August. [Downloadable!] (restricted)
  18. Glascock, John L & Lu, Chiuling & So, Raymond W, 2000. "Further Evidence on the Integration of REIT, Bond, and Stock Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 20(2), pages 177-94, March. [Downloadable!] (restricted)
  19. Liu, Crocker H & Mei, Jianping, 1992. "The Predictability of Returns on Equity REITs and Their Co-movement with Other Assets," The Journal of Real Estate Finance and Economics, Springer, vol. 5(4), pages 401-18, December.
  20. Balduzzi, Pierluigi, 1995. "Stock returns, inflation, and the 'proxy hypothesis': A new look at the data," Economics Letters, Elsevier, vol. 48(1), pages 47-53, April. [Downloadable!] (restricted)
  21. Black, Angela & Fraser, Patricia, 1995. "U.K. Stock Returns: Predictability and Business Conditions," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 63(0), pages 85-102, Suppl..
  22. Geltner, David & Mei, Jianping, 1995. "The Present Value Model with Time-Varying Discount Rates: Implications for Commercial Property Valuation and Investment Decisions," The Journal of Real Estate Finance and Economics, Springer, vol. 11(2), pages 119-35, September.
  23. Jarl G. Kallberg & Crocker H. Liu & D. Wylie Greig, 1996. "The Role of Real Estate in the Portfolio Allocation Process," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(3), pages 359-377. [Downloadable!] (restricted)
  24. Keim, Donald B. & Stambaugh, Robert F., 1986. "Predicting returns in the stock and bond markets," Journal of Financial Economics, Elsevier, vol. 17(2), pages 357-390, December. [Downloadable!] (restricted)
    Other versions:
  25. Gregory H. Chun & J. Sa-Aadu & James D. Shilling, 2004. "The Role of Real Estate in an Institutional Investor's Portfolio Revisited," The Journal of Real Estate Finance and Economics, Springer, vol. 29(3), pages 295-320, November. [Downloadable!]
  26. Karolyi, G Andrew & Sanders, Anthony B, 1998. "The Variation of Economic Risk Premiums in Real Estate Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 17(3), pages 245-62, November. [Downloadable!] (restricted)
  27. Rakesh Bharati & Manoj Gupta, 1992. "Asset Allocation and Predictability of Real Estate Returns," Journal of Real Estate Research, American Real Estate Society, vol. 7(4), pages 469-484. [Downloadable!]
  28. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September. [Downloadable!] (restricted)
  29. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August. [Downloadable!] (restricted)
  30. Avramov, Doron, 2002. "Stock return predictability and model uncertainty," Journal of Financial Economics, Elsevier, vol. 64(3), pages 423-458, June. [Downloadable!] (restricted)
  31. Hoevenaars, Roy P.M.M. & Molenaar, Roderick D.J. & Schotman, Peter C. & Steenkamp, Tom B.M., 2008. "Strategic asset allocation with liabilities: Beyond stocks and bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2939-2970, September. [Downloadable!] (restricted)
  32. Ling, David C & Naranjo, Andy & Ryngaert, Michael D, 2000. "The Predictability of Equity REIT Returns: Time Variation and Economic Significance," The Journal of Real Estate Finance and Economics, Springer, vol. 20(2), pages 117-36, March. [Downloadable!] (restricted)
  33. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November. [Downloadable!] (restricted)
  34. Ross, Stephen A & Zisler, Randall C, 1991. "Risk and Return in Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 175-90, June.
  35. Pesaran, M Hashem & Timmermann, Allan, 2000. "A Recursive Modelling Approach to Predicting UK Stock Returns," Economic Journal, Royal Economic Society, vol. 110(460), pages 159-91, January. [Downloadable!] (restricted)
    Other versions:
  36. Roger G. Ibbotson & Laurence B. Siegel, 1984. "Real Estate Returns: A Comparison with Other Investments," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 219-242. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio choice over the life-cycle when the stock and labor markets are cointegrated," Working Paper Series WP-07-11, Federal Reserve Bank of Chicago. [Downloadable!]
  2. Massimo Guidolin & Carrie Fangzhou Na, 2007. "The economic and statistical value of forecast combinations under regime switching: an application to predictable U.S. returns," Working Papers 2006-059, Federal Reserve Bank of St. Louis. [Downloadable!]
  3. Giorgio Bellettini & Filippo Taddei, 2009. "Real Estate Prices and the Importance of Bequest Taxation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  4. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2009. "Time and risk diversification in real estate investments: assessing the ex post economic value," Working Papers 2009-001, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? RePEc and its associated services are free for contributors and users, and do not accept any advertising.

This page was last updated on 2009-10-30.


This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.