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Diversification When It Hurts? The Joint Distributions of Real Estate and Equity Markets

Author

Listed:
  • John Knight
  • Colin Lizieri

    (Department of Real Estate & Planning, University of Reading)

  • Stephen Satchell

Abstract

Much of the literature on the construction of mixed asset portfolios and the case for property as a risk diversifier rests on correlations measured over the whole of a given time series. Recent developments in finance, however, focuses on dependence in the tails of the distribution. Does property offer diversification from equity markets when it is most needed - when equity returns are poor. The paper uses an empirical copula approach to test tail dependence between property and equity for the UK and for a global portfolio. Results show strong tail dependence: in the UK, the dependence in the lower tail is stronger than in the upper tail, casting doubt on the defensive properties of real estate stocks.

Suggested Citation

  • John Knight & Colin Lizieri & Stephen Satchell, 2005. "Diversification When It Hurts? The Joint Distributions of Real Estate and Equity Markets," Real Estate & Planning Working Papers rep-wp2005-16, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:repxwp:rep-wp2005-16
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    File URL: http://www.henley.reading.ac.uk/rep/fulltxt/1605.pdf
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    References listed on IDEAS

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