10,561 research outputs found
Optimal composition of hybrid/blended real estate portfolios
Purpose: The purpose of this paper is to establish an optimum mix of liquid, publicly traded assets that may be added to a real estate portfolio, such as those held by open-ended funds, to provide the liquidity required by institutional investors such as UK defined contribution pension funds. This is with the objective of securing liquidity while not unduly compromising the risk-return characteristics of the underlying asset class. This paper considers the best mix of liquid assets at different thresholds for a liquid asset allocation, with the performance then evaluated against that of a direct real estate benchmark index.
Design/Methodology/Approach: The authors employ a mean-tracking error optimisation approach in determining the optimal combination of liquid assets that can be added to a real estate fund portfolio. The returns of the optimised portfolios are compared to the returns for portfolios that employ the use of either cash or listed real estate alone as a liquidity buffer. Multivariate Generalised Autoregressive models are used along with rolling correlations and tracking errors to gauge the effectiveness of the various portfolios in tracking the performance of the benchmark index.
Findings: The results indicate that applying formal optimisation techniques leads to a considerable improvement in the ability of the returns from blended real estate portfolios to track the underlying real estate market. This is the case at a number of different thresholds for the liquid asset allocation and in cases where a minimum return requirement is imposed.
Practical Implications: The results suggest that real estate fund managers can realise the liquidity benefits of incorporating publicly traded assets into their portfolios without sacrificing the ability to deliver real estate-like returns. However, in order to do so, a wider range of liquid assets must be considered, not just cash.
Originality/value: Despite their importance in the real estate investment industry, comparatively few studies have examined the structure and operation of open-ended real estate funds. To the authors’ knowledge, this is the first study to analyse the optimal composition of liquid assets within blended or hybrid real estate portfolios
Tracking Error and Active Portfolio Management
Persistent bear market conditions have led to a shift of focus in the tracking error literature. Until recently the portfolio allocation literature focused on tracking error minimization as a consequence of passive benckmark management under portfolio weights, transaction costs and short selling constraints. Abysmal benchmark performance shifted the literature's focus towards active portfolio strategies that aim at beating the benchmark while keeping tracking error within acceptable bounds. We investigate an active (dynamic) portfolio allocation strategy that exploits the predictability in the conditional variance-covariance matrix of asset returns. To illustrate our procedure we use Jorion's (2002) tracking error frontier methodology. We apply our model to a representative portfolio of Australian stocks over the period January 1999 through November 2002.
Sparse and stable Markowitz portfolios
We consider the problem of portfolio selection within the classical Markowitz
mean-variance framework, reformulated as a constrained least-squares regression
problem. We propose to add to the objective function a penalty proportional to
the sum of the absolute values of the portfolio weights. This penalty
regularizes (stabilizes) the optimization problem, encourages sparse portfolios
(i.e. portfolios with only few active positions), and allows to account for
transaction costs. Our approach recovers as special cases the
no-short-positions portfolios, but does allow for short positions in limited
number. We implement this methodology on two benchmark data sets constructed by
Fama and French. Using only a modest amount of training data, we construct
portfolios whose out-of-sample performance, as measured by Sharpe ratio, is
consistently and significantly better than that of the naive evenly-weighted
portfolio which constitutes, as shown in recent literature, a very tough
benchmark.Comment: Better emphasis of main result, new abstract, new examples and
figures. New appendix with full details of algorithm. 17 pages, 6 figure
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Dynamic asset (and liability) management under market and credit risk
We introduce a modelling paradigm which integrates credit risk and market
risk in describing the random dynamical behaviour of the underlying fixed income assets.
We then consider an asset and liability management (ALM) problem and develop a mul-
tistage stochastic programming model which focuses on optimum risk decisions. These
models exploit the dynamical multiperiod structure of credit risk and provide insight
into the corrective recourse decisions whereby issues such as the timing risk of default is
appropriately taken into consideration. We also present a index tracking model in which
risk is measured (and optimised) by the CVaR of the tracking portfolio in relation to the
index. Both in- and out-of-sample (backtesting) experiments are undertaken to validate
our approach. In this way we are able to demonstrate the feasibility and flexibility of
the chosen framework
Cointegration and Asset Allocation: A New Fund Strategy
Many recent papers have documented the existence of periodicities in returns, return volatility, bid-ask spreads and trading volume, in both equity and foreign exchange markets. In this paper, we propose and employ a new test for detecting subtle periodicities in financial markets based on a signal coherence function. The technique is applied to a set of seven half-hourly exchange rate series. Overall, we find the signal coherence to be maximal at the 8 hour and 12 hour frequencies. Retaining only the most coherent frequencies for each series, we implement a trading rule based on these observed periodicities. Our results demonstrate in all cases except one that, in gross terms, the rules are able to generate returns considerably greater than those of a buy-and-hold strategy. We conjecture that this methodology could constitute an important tool for market microstructure researchers, which will enable them to better detect, quantify and rank the various periodic components in financial data.Hedge Fund, Cointegration, Equity, Market Neutral
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