Diversification effect of real estate investment trusts: Comparing copula functions with kernel methods

Abstract

Value at Risk estimated with joint distribution methodologies demonstrates that risk is lower for portfolios of real estate investment trusts (REITs) and smallbusiness equities compared with a single-asset holding. Benefits from diversification were largest in 2001-2003 and the smallest from 2006-2008.Previous research using Value at Risk points out the importance of model selection. Various estimation approaches affected results modestly over the entire period (1989-mid 2008). The Value at Risk is -3.1% for two copula models and -3.2% for a nonparametric empirical joint density, at a 1% probability level for weekly returns. After June 1996, the nonparametric copula model consistently returned the lowest risk estimate among the three joint distribution methods.Time-varying risk is a more important driver in the results than model specification. The highest portfolio risk was found for the period after August 2006 (weekly losses of 4.4% to 5%). The distribution-based model results were closer to the undiversified model results than in the earlier time periods, which supports the premise that contagion across asset classes characterises the post-2006 real estate bust, but is not a strong characteristic of the market over a longer investment horizon that includes growth phases of the business cycle.

Study on the Impact of Stock Market Performance on REITs Market in China

“…He believes that REITs products are very critical components in the portfolio field. The existence of such factors can disperse risks and reduce their uncertainty as much as possible [1] ; Deng X et al(2018)specially analyzed the cost problem during the issuance of REITs and the profound impact on the return rate of real estate trust funds after the official listing. They believed that in the actual circulation process, once the cost limit of the issuance continues to increase, it will lead to the emergence of non-public transactions.…”