Cross Hedging Effectiveness of Real Estate Securities Exchange Traded Funds (original) (raw)
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On the hedging benefits of REITs: The role of risk aversion and market states
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We propose a dynamic, forward-looking hedging strategy to manage stock market risks via positions in REITs, conditional on the level of risk aversion. Our findings show that REITs do not only offer significant risk reduction for passive portfolios, but also offer much improved risk-adjusted returns with the greatest benefits observed for Australia, Canada and the U.S. Overall, our findings suggest that time-varying risk aversion can be utilized to (i) establish effective hedges against stock market risks via positions in REITS, and (ii) improve the risk-return profile of passive portfolios.
International Portfolio of Real Estate Investment and Hedging: A Revisit
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We use office data from ten cities in the Asia-Pacific region from 4Q2001 to 2Q2012 to propose a forward-looking investment appraisal framework to compare the effectiveness of two currency risk hedging strategies for a portfolio of real estate investments in ten cities of seven Asia-Pacific countries. This is aimed at determining the optimal choice among "unhedged", "artificially" hedged and "natural" hedged options. Analyses based on NPV, IRR, Sharpe Ratio, Jensen's alpha and stochastic dominance were done for 3, 5 and 7-year holding periods. All the results show that the "natural" hedge strategy is the optimal choice as it provides superior returns.
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Optimal portfolio allocation with Asian Hedge Funds and Asian REITs
International Journal of Services Sciences, 2008
During the past years, the institutional interest in investments into hedge funds and real estate investment trusts has grown considerably. In this paper the benefits of investing in these asset classes are analyzed by applying models that recognize higher-order moments or the whole return distribution like the power-utility, Omega, and Score-value model. Trying to obtain more general results than those we can find from historical data only, we modelled the asset returns by Markov switching processes and did a Monte Carlo study. Within this design we analyzed the optimal allocations to hedge funds and REITs statically and with monthly reallocations based on data from Asian markets. Our main findings are that in the static case the utility model and the Score model are dominant, whereas the mean-variance model appears to be the model of first choice in the dynamic case. In both settings hedge funds are the most dominant asset of the optimal portfolios. REITs are mainly used for diversification and added at comparably lower rates.
Journal of Mathematical Finance, 2014
Using mean-variance utility function analysis with various degrees of risk aversion, this research examines the impact of Real Estate Investment Trusts (REITs) in creating optimal portfolios. It also examines and develops a sensitivity analysis for differential risk premiums in REIT stocks and the effect in determining an optimal portfolio mix by applying mean variance analysis. When the combined risk premium of REITs and stocks is 1.5%, we find investors with risk aversion between 1 and 6 are better off investing almost entirely in REITs, short selling the bond and investing very little in stocks. Investors can benefit in the same way even when the risk premium of REITs and stock is fixed at 2.0% with risk aversion equal to between 1 and 9. However, when the risk premium of REITs and stock is fixed at 2.5%, the investor's risk aversion factor is irrelevant, and it suggests investors should short sell the bond and invest mostly in REITs. The marginal effect of changes in (portfolio returns) rR on the optimal portfolio weights in REITs is observed to have a sharp decline when risk aversion is increased. However, the impact of that change in the REIT-Stock correlation is non-existent as the optimal weight in REITs is increased. In addition, there is little obvious change when the risk aversion is increased. Therefore, the change of weights in REITs in the optimal portfolio is more significant than the correlation between REITs and stock performance. Results also indicate that the investor should consider how to maximize their return using various levels of risk aversion and not by using the correlation between stock and REITs.
2015
Using recent data (2002-2012) from the US financial markets, we study the magnitude and benefits of Real Estate Investment Trust (REIT) and common stock in portfolio diversification. In particular, we examine the effects of risk-reduction benefits through diversifying among common stocks via Equity REITs (EREITs) and Mortgage REITs (MREITs). In addition, overall performance measures are calculated and compared among REIT, common stock and mixed-asset portfolios. We observe that investors can benefit from diversification using EREITs but not MREITs. In fact, MREITs turn out to be the worst asset class to be in diversifying portfolio. This conclusion is in contrast with Kuhle (1987) who claims improvement of portfolio risk reduction with MREITs. Our finding, however, is consistent with Hartzell et al. (1986) and Chen et al. (2005). Finally, even though our data period consists one of the historic collapses of real estate market in the US, it still indicates the EREITs still offers div...
2011
Real Estate Investment Trusts (REITs) are the only truly liquid assets related to real estate investments. We study the behavior of U.S. REITs over the past three decades and document their return characteristics. REITs have somewhat less market risk than equity; their betas against a broad market index average about .65. Decomposing their covariances into principal components reveals several strong factors. REIT characteristics differ to some extent from those of the S&P/Case-Shiller (SCS) residential real estate indexes. This is partly attributable to methods of index construction. Our examination of REITs suggests that investment in real estate is far more risky than what might be inferred from the widely-followed SCS series. REITs, unlike SCS series are forward looking, and this helps them in the prediction of SCS returns. REIT forecasts of SCS returns are reasonably precise over a number of periods.
The Inflation-Hedging Properties of Risk Assets: The Case of REITs
This study examines the inflation-hedging abilities of REITs over the period 1972:2-1992:12 to determine whether REITs act as a hedge against expected and/or unexpected inflation. The time period used in this study is substantially longer than in earlier studies. A model of real estate returns is derived that has components for expected and unexpected returns and allows for variation in the real return on risky assets. The results indicate that REITs provide some hedging capability against expected inflation, but act as perverse hedges against unexpected inflation. These results are robust with respect to time period studied, measure of expected inflation and proxy for the market portfolio, indicating that the apparent perverse hedging property of real estate investments is not due to methodological problems.