Conditional Correlations and Real Estate Investment Trusts

The paper studies the temporal variations in the conditional correlations between REIT returns and equity, bond and commodity returns.

Author(s):

James Chong

California State University-Northridge

Joelle Miffre

EDHEC Business School

Simon Stevenson

Cass Business School, City University

While REITs are often presented as useful tools for diversification, little is known of the way their returns correlate with the returns of other asset classes over time and in periods of high volatility. This paper addresses this issue and draws two conclusions. First, the correlations between REITs and equity returns rose over the period analyzed, while the correlations with bonds and commodities fell. This indicates to equity portfolio managers that real estate has lost some of its diversification properties, but to bond and commodity portfolio managers it has become attractive for strategic asset allocation. Second, the correlations with REITs rose especially in periods of above average volatility in equity and bond markets. This is unfortunate as it is precisely in periods of high volatility that investors need the benefits of diversification the most. There are, however, two noticeable exceptions (for the US government securities and the GSCI), where the conditional correlations with REITs fell in periods of high volatility in these markets. This indicates that to reduce the total risk of their portfolio investors in US government securities and commodities should tilt their asset allocation more towards real estate when they anticipate changes in monetary policy or abnormal fluctuations in commodity prices.
Pdf
Conditional Correlations and Real Estate Investment Trusts...
(-1.00 B)
Type: Working paper
Date: le 02/06/2008
Extra information : For more information, please contact Joanne Finlay, EDHEC Research and Development Department [ joanne.finlay@edhec.edu ] The contents of this paper do not necessarily reflect the opinions of EDHEC Business School.
Research Cluster : Finance

See Also

LegalEDHEC present to foster legal innovation
News
- 20-06-2018
On major political subjects, as well as on legal innovation, the LegalEDHEC Research...
 THE ECONOMETRIC SOCIETY - NORTH AMERICA SUMMER MEETING - June 2018
News
- 19-06-2018
Two PhD in Finance alumni Andrea Tarelli, PhD (2014) and François Cocquemas, PhD (2016...
Great success for the 25th EDHEC Raid
News
- 19-06-2018
"A big thank you to the whole Raid EDHEC team! A top team for an incredible raid. I can...
EDHEC ranked in the world’s top 3 business schools for Finance by the Financial Times
News
- 18-06-2018
EDHEC Business School has consolidated its standing in the Financial Times global...