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Time Variation in Diversification Benefits of Commodity, REITs, and TIPS

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  • Jing-zhi Huang

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  • Zhaodong Zhong

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Abstract

Diversification benefits of three “hot” asset classes—Commodity, Real Estate Investment Trusts (REITs), and Treasury Inflation-Protected Securities (TIPS)—are well-studied on an individual basis and in a static setting. Using data from 1970 to 2010, this paper documents both that the three asset classes are in general not substitutes for each other, and that diversification benefits of each asset class change substantially over time. Therefore, all three asset classes ought to be included in investors’ portfolios. Furthermore, we show that the observed time variation in diversification benefits can be explained by time-varying return correlations. To see the implications of these findings for asset allocation in practice, we examine the out-of-sample performance of portfolio strategies, based on a variety of correlation structures. We find that the Dynamic Conditional Correlation (DCC) model (Engle, J Bus Econ Stat 20(3):339–350, 2002 ) outperforms other correlation structures, such as rolling-window, historical, and constant correlations. Our findings suggest that diversification benefits of the three asset classes should be examined in a dynamic setting, and that investors need to use appropriate correlation estimates to adjust for such time variation. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Jing-zhi Huang & Zhaodong Zhong, 2013. "Time Variation in Diversification Benefits of Commodity, REITs, and TIPS," The Journal of Real Estate Finance and Economics, Springer, vol. 46(1), pages 152-192, January.
  • Handle: RePEc:kap:jrefec:v:46:y:2013:i:1:p:152-192
    DOI: 10.1007/s11146-011-9311-6
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    References listed on IDEAS

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    Cited by:

    1. Grosche, Stephanie & Heckelei, Thomas, 2014. "Directional Volatility Spillovers between Agricultural, Crude Oil, Real Estate and other Financial Markets," Discussion Papers 166079, University of Bonn, Institute for Food and Resource Economics.
    2. Yen-Hsien Lee, 2014. "An international analysis of REITs and stock portfolio management based on dynamic conditional correlation models," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(2), pages 165-180, May.
    3. repec:kap:jrefec:v:56:y:2018:i:2:d:10.1007_s11146-016-9593-9 is not listed on IDEAS
    4. Leh-Chyan So & Jun-Yang Yu, 2015. "IMPROVED DETECTION OF RARE-EVENT RISK OF A PORTFOLIO WITH U.S. REITs," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 1-25, December.
    5. Bruno Milani & Paulo Sergio Ceretta, 2013. "Do Brazilian REITs depend on Real Estate sector companies or Overall Market?," Economics Bulletin, AccessEcon, vol. 33(4), pages 2948-2957.
    6. Grishchenko, Olesya V. & Vanden, Joel M. & Zhang, Jianing, 2016. "The informational content of the embedded deflation option in TIPS," Journal of Banking & Finance, Elsevier, vol. 65(C), pages 1-26.
    7. repec:bor:bistre:v:17:y:2017:i:4:p:199-215 is not listed on IDEAS

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    Keywords

    Diversification; Commodity; REITs; TIPS; DCC;

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