Long-term benefits from investing in international real estate

This paper analyses long- and short-term co-movements between 14 international real estate stock markets based on bivariate testing for cointegration and correlation analysis. The results indicate that there exist strong long-term relationships within economic and geographical regions, but less long-run linkages between real estate markets in different continents. Thus, investors would benefit from broadening their investment horizon from their domestic continent to Australia, Europe, and Northern America. Furthermore, it is shown that within each region there are one or two key markets influencing neighbouring markets like Australia in the Asia-Pacific region, the U.S. in the Anglo-Saxon area, and France and the Netherlands in the EMU. Therefore it is implied, from an investor’s point of view, that it should be sufficient to focus only on these central markets. With respect to the efficient market hypothesis, the findings by cointegration analysis put some further doubt on its validity for securitized real estate markets. --Cointegration,Correlation Analysis,Diversification,Securitized Real Estate Markets

Market efficiency in the emerging securitized real estate markets

This paper tests the random walk hypothesis and market efficiency for twelve emerging as well as for four developed securitized real estate markets from 1992 to 2009. Random walk properties of equity prices influence return dynamics, and market efficiency is often considered an essential criterion in the assessment of the functionality of markets and the asset pricing process, which is of significant relevance for emerging markets in particular. The analysis is based on autocorrelation tests as well as both single variance and multiple variance ratio tests. Furthermore, non-parametric runs tests are conducted. Empirical evidence shows that the efficient market hypothesis in its weak form is not rejected by any statistical test for seven of the twelve analyzed emerging securitized real estate markets. This result is surprising since all four developed securitized real estate stock markets analyzed in this study do not follow a random walk. The results are confirmed by the analysis of excess returns following from technical trading rules. --Securitized real estate markets,market efficiency,random walk hypothesis,variance ratio tests,runs test,trading strategies

A-posteriori error estimates for the localized reduced basis multi-scale method

We present a localized a-posteriori error estimate for the localized reduced basis multi-scale (LRBMS) method [Albrecht, Haasdonk, Kaulmann, Ohlberger (2012): The localized reduced basis multiscale method]. The LRBMS is a combination of numerical multi-scale methods and model reduction using reduced basis methods to efficiently reduce the computational complexity of parametric multi-scale problems with respect to the multi-scale parameter $\varepsilon$ and the online parameter $\mu$ simultaneously. We formulate the LRBMS based on a generalization of the SWIPDG discretization presented in [Ern, Stephansen, Vohralik (2010): Guaranteed and robust discontinuous Galerkin a posteriori error estimates for convection-diffusion-reaction problems] on a coarse partition of the domain that allows for any suitable discretization on the fine triangulation inside each coarse grid element. The estimator is based on the idea of a conforming reconstruction of the discrete diffusive flux, that can be computed using local information only. It is offline/online decomposable and can thus be efficiently used in the context of model reduction

Linkages between international securitized real estate markets: Further evidence from time-varying and stochastic cointegration

This paper analyzes long-run co-movements between international real estate stock markets and between regions based on bivariate and multivariate tests for cointegration. While the topic has been analyzed in previous studies such as Gallo and Zhang (2009) and Yunus (2009) among others, this paper is of significant contribution to existing studies since we compare results from different cointegration methodologies and explicitly control for instability in cointegration relationships and deviations from normality. Furthermore, the analyzed time period is longer than in previous studies and ranges from 1990 to 2009 covering 20 years. In line with previous studies, the empirical results indicate several cointegration relationships between national real estate stock markets. However, it is also shown that most cointegration relationships are unstable and that the results from cointegration methodologies suggested by Engle and Granger (1987) and Johansen (1988) might be misleading in that common long-run comovements appear to be stronger when structural breaks are considered. Thus, the results indicate that investors would benefit from broadening their investment horizon from their domestic continent to international markets. This particularly applies for the European securitized real estate markets. --international securitized real estate markets,diversification,time-varying cointegration,stochastic cointegration

International diversification with securitized real estate and the veiling glare from currency risk

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

Downside risk optimization in securitized real estate markets

Optimization of international securitized real estate portfolios has been a key topic for several decades. However, most previous analysis has focused on regional diversification by applying the traditional mean-variance (MV) framework suggested by Markowitz (1952) even if the limitations of this approach are well-known. Thus, we focus on a more suitable and appealing downside risk (DR) framework suggested by Estrada (2008), which applies a similar optimization algorithm as the MV framework. The analysis covers the eight largest securitized real estate markets from January 1990 to December 2009 and thus captures a more global perspective. The main findings are as follows: first, the return distributions are non-normally distributed and negatively skewed. Second, optimal portfolio weights differ substantially between the MV and DR approach. Third, portfolio weights are shifted from the U.S. and Australian market to the Dutch and the French market when applying the DR framework instead of the MV framework. Fourth, the dominance of the DR framework is well-documented by comparing out-of-sample performance. The empirical results are remarkable and emphasize the practical merit of the presented DR framework for investors and portfolio managers. --Downside Risk Analysis,International Real Estate Markets,Portfolio Management,Portfolio Optimization,Out-of-Sample Analysis