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Investing for the Long-Run in European Real Estate. Does Predictability Matter?

Author

Listed:
  • Carolina Fugazza

    (Center for Research on Pensions and Welfare Policies)

  • Massimo Guidolin

    (Federal Reserve Bank of St. Louis)

  • Giovanna Nicodano

    (Department of Economics, University of Turin and Center for Research on Pensions and Welfare Policies, Turin)

Abstract

We calculate optimal portfolio choices for a long-horizon, risk-averse European investor who diversifies among 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 10 and 30% in most cases. Under plausible assumptions, the welfare costs of either ignoring predictability or restricting portfolio choices to financial assets only are found to be in the order of at least 100 basis points per year. These results are robust to changes in the benchmarks and in the statistical framework.

Suggested Citation

  • Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2005. "Investing for the Long-Run in European Real Estate. Does Predictability Matter?," CeRP Working Papers 40, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    • Handle: RePEc:crp:wpaper:40
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    File URL: http://www.cerp.carloalberto.org/wp-content/uploads/2008/12/wp_40_it.pdf?f6fa34
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    Cited by:

    1. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2010. "1/N and Long Run Optimal Portfolios: Results for Mixed Asset Menus," Carlo Alberto Notebooks 190, Collegio Carlo Alberto.

    More about this item

    Keywords

    Optimal asset allocation; real estate; predictability; parameter uncertainty;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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