Bayes-Stein Estimators and International Real Estate Asset Allocation

Abstract

This article re-examines the issue of international diversification in real estate securities and attempts to address the problem of estimation error in the inputted parameters through the use of alternative techniques. The results see an increased stability in calculated portfolio allocations in comparison to the classical mean-variance tangency approach, and see significant improvements in out-of-sample performance. In addition, the minimum variance portfolio significantly outperforms a naive equally-weighted strategy. These results are also largely consistent when transaction costs are incorporated into the analysis.