IDEAS home Printed from https://ideas.repec.org/p/zbw/vfsc11/48705.html
   My bibliography  Save this paper

International Diversification with Securitized Real Estate and the Veiling Glare from Currency Risk

Author

Listed:
  • Schindler, Felix
  • Kröncke, Tim-Alexander

Abstract

This paper analyzes diversification benefits from international securitized real estate in a mixed-asset context. We apply regression-based mean-variance efficiency tests, conditional on currency-unhedged and fully hedged portfolios to account for foreign exchange risk exposure. From the perspective of a US investor, it is shown that first, international diversification is superior to a US mixed-asset portfolio, second, adding international real estate to an already internationally diversified stock and bond portfolio results in a further significant improvement of the risk-return trade-off and, third, considering unhedged international assets could lead to biased asset allocation decisions not realizing the true diversification benefits from international assets. Our in-sample results are quite robust in out-of-sample analysis and when investment frictions like short selling constraints are introduced.

Suggested Citation

  • Schindler, Felix & Kröncke, Tim-Alexander, 2011. "International Diversification with Securitized Real Estate and the Veiling Glare from Currency Risk," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48705, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc11:48705
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/48705/1/VfS_2011_pid_107.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Glabadanidis, Paskalis, 2009. "Measuring the economic significance of mean-variance spanning," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 596-616, May.
    2. John Y. Campbell & Karine Serfaty-De Medeiros & Luis M. Viceira, 2010. "Global Currency Hedging," Journal of Finance, American Finance Association, vol. 65(1), pages 87-121, February.
    3. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    4. Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
    5. Cheol S. Eun & Sandy Lai & Frans A. de Roon & Zhe Zhang, 2010. "International Diversification with Factor Funds," Management Science, INFORMS, vol. 56(9), pages 1500-1518, September.
    6. Ledoit, Oliver & Wolf, Michael, 2008. "Robust performance hypothesis testing with the Sharpe ratio," Journal of Empirical Finance, Elsevier, vol. 15(5), pages 850-859, December.
    7. Hanno Lustig & Adrien Verdelhan, 2007. "The Cross Section of Foreign Currency Risk Premia and Consumption Growth Risk," American Economic Review, American Economic Association, vol. 97(1), pages 89-117, March.
    8. Raymond Kan & Guofu Zhou, 2012. "Tests of Mean-Variance Spanning," Annals of Economics and Finance, Society for AEF, vol. 13(1), pages 139-187, May.
    9. Huberman, Gur & Kandel, Shmuel, 1987. " Mean-Variance Spanning," Journal of Finance, American Finance Association, vol. 42(4), pages 873-888, September.
    10. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-262, April.
    11. Bekaert, Geert & Harvey, Campbell R, 1995. " Time-Varying World Market Integration," Journal of Finance, American Finance Association, vol. 50(2), pages 403-444, June.
    12. J. Sa-Aadu & James Shilling & Ashish Tiwari, 2010. "On the Portfolio Properties of Real Estate in Good Times and Bad Times-super-1," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 529-565.
    13. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2011. "Common Risk Factors in Currency Markets," Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3731-3777.
    14. William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2005. "Long-Term Global Market Correlations," The Journal of Business, University of Chicago Press, vol. 78(1), pages 1-38, January.
    15. Longin, Francois & Solnik, Bruno, 1995. "Is the correlation in international equity returns constant: 1960-1990?," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 3-26, February.
    16. Arturo Bris & William N. Goetzmann & Ning Zhu, 2007. "Efficiency and the Bear: Short Sales and Markets Around the World," Journal of Finance, American Finance Association, vol. 62(3), pages 1029-1079, June.
    17. Jobson, J. D. & Korkie, Bob, 1989. "A Performance Interpretation of Multivariate Tests of Asset Set Intersection, Spanning, and Mean-Variance Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(02), pages 185-204, June.
    18. Nijman, T.E. & de Roon, F.A., 2001. "Testing for mean-variance spanning : A survey," Other publications TiSEM 0159f80a-c61b-4519-b004-a, Tilburg University, School of Economics and Management.
    19. de Jong, Frank & de Roon, Frans A., 2005. "Time-varying market integration and expected returns in emerging markets," Journal of Financial Economics, Elsevier, vol. 78(3), pages 583-613, December.
    20. He, Hua & Modest, David M, 1995. "Market Frictions and Consumption-Based Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 94-117, February.
    21. Vihang Errunza & Ked Hogan & Mao-Wei Hung, 1999. "Can the Gains from International Diversification Be Achieved without Trading Abroad?," Journal of Finance, American Finance Association, vol. 54(6), pages 2075-2107, December.
    22. Nijman, T.E. & de Roon, F.A. & Werker, B.J.M., 2001. "Testing for Mean-Variance spanning with short sales constraints and transaction costs : The case of emerging markets," Other publications TiSEM f4a3551a-d7ae-4c22-8813-b, Tilburg University, School of Economics and Management.
    23. Eun, Cheol S. & Lee, Jinsoo, 2010. "Mean-variance convergence around the world," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 856-870, April.
    24. Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, vol. 64(6), pages 1439-1467, November.
    25. Geert Bekaert & Campbell R. Harvey & Angela Ng, 2005. "Market Integration and Contagion," The Journal of Business, University of Chicago Press, vol. 78(1), pages 39-70, January.
    26. DeRoon, Frans A. & Nijman, Theo E., 2001. "Testing for mean-variance spanning: a survey," Journal of Empirical Finance, Elsevier, vol. 8(2), pages 111-155, May.
    27. de Roon, F.A. & Nijman, T.E. & Werker, B.J.M., 2003. "Currency hedging for international stock portfolios : The usefulness of mean variance analysis," Other publications TiSEM ef0968be-f501-4434-bc45-0, Tilburg University, School of Economics and Management.
    28. Gourieroux, Christian & Holly, Alberto & Monfort, Alain, 1982. "Likelihood Ratio Test, Wald Test, and Kuhn-Tucker Test in Linear Models with Inequality Constraints on the Regression Parameters," Econometrica, Econometric Society, vol. 50(1), pages 63-80, January.
    29. Shaun A. Bond & G. Andrew Karolyi & Anthony B. Sanders, 2003. "International Real Estate Returns: A Multifactor, Multicountry Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(3), pages 481-500, September.
    30. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    31. Elias Oikarinen & Martin Hoesli & Camilo Serrano, 2011. "The Long-Run Dynamics between Direct and Securitized Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 33(1), pages 73-104.
    32. Glen, Jack & Jorion, Philippe, 1993. " Currency Hedging for International Portfolios," Journal of Finance, American Finance Association, vol. 48(5), pages 1865-1886, December.
    33. de Roon, Frans A. & Nijman, Theo E. & Werker, Bas J. M., 2003. "Currency hedging for international stock portfolios: The usefulness of mean-variance analysis," Journal of Banking & Finance, Elsevier, vol. 27(2), pages 327-349, February.
    34. Jack H. Rubens & David A. Louton & Elizabeth J. Yobaccio, 1998. "Measuring the Significance of Diversification Gains," Journal of Real Estate Research, American Real Estate Society, vol. 16(1), pages 73-86.
    35. Kodde, David A & Palm, Franz C, 1986. "Wald Criteria for Jointly Testing Equality and Inequality Restriction s," Econometrica, Econometric Society, vol. 54(5), pages 1243-1248, September.
    36. Bekaert, Geert & Urias, Michael S, 1996. " Diversification, Integration and Emerging Market Closed-End Funds," Journal of Finance, American Finance Association, vol. 51(3), pages 835-869, July.
    37. Crocker H. Liu & Jianping Mei, 1998. "The Predictability of International Real Estate Markets, Exchange Rate Risks and Diversification Consequences," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(1), pages 3-39.
    38. Driessen, Joost & Laeven, Luc, 2007. "International portfolio diversification benefits: Cross-country evidence from a local perspective," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1693-1712, June.
    39. Eun, Cheol S & Resnick, Bruce G, 1988. " Exchange Rate Uncertainty, Forward Contracts, and International Portfolio Selection," Journal of Finance, American Finance Association, vol. 43(1), pages 197-215, March.
    40. Camilo SERRANO & Martin HOESLI, "undated". "Global Securitized Real Estate Benchmarks and Performance," Swiss Finance Institute Research Paper Series 08-39, Swiss Finance Institute.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Auer, Benjamin R. & Schuhmacher, Frank, 2016. "Do socially (ir)responsible investments pay? New evidence from international ESG data," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 51-62.
    2. Kröncke, Tim-Alexander & Schindler, Felix, 2011. "Bedeutung von Immobilieninvestments in internationalen Anlageportfolios," ZEW Wachstums- und Konjunkturanalysen, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research, vol. 14(2), pages 10-11.
    3. repec:kap:jrefec:v:56:y:2018:i:3:d:10.1007_s11146-017-9646-8 is not listed on IDEAS
    4. Auer, Benjamin R. & Schuhmacher, Frank, 2013. "Performance hypothesis testing with the Sharpe ratio: The case of hedge funds," Finance Research Letters, Elsevier, vol. 10(4), pages 196-208.
    5. repec:kap:fmktpm:v:31:y:2017:i:2:d:10.1007_s11408-017-0286-z is not listed on IDEAS
    6. Alexander, Carol & Korovilas, Dimitris & Kapraun, Julia, 2016. "Diversification with volatility products," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 213-235.

    More about this item

    Keywords

    Diversification Benefits; International Mixed-Asset Portfolios; Currency Hedging; Spanning Tests; Short Selling Constraints;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc11:48705. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics). General contact details of provider: http://edirc.repec.org/data/vfsocea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.