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Can linear predictability models Time Bull and Bear Real Estate Markets? Out-of-sample evidence from REIT portfolios
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Bianchi, Daniele and Guidolin, Massimo (2014) Can linear predictability models Time Bull and Bear Real Estate Markets? Out-of-sample evidence from REIT portfolios. Journal of Real Estate Finance and Economics, 49 (1). pp. 116-164. doi:10.1007/s11146-013-9411-6 ISSN 0895-5638.
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Official URL: http://dx.doi.org/10.1007/s11146-013-9411-6
Abstract
A recent literature has shown that REIT returns contain strong evidence of bull and bear dynamic regimes that may be best captured using nonlinear econometric models of the Markov switching type. In fact, REIT returns would display regime shifts that are more abrupt and persistent than in the case of other asset classes. In this paper we ask whether and how simple linear predictability models of the vector autoregressive (VAR) type may be extended to capture the bull and bear patterns typical of many asset classes, including REITs. We find that nonlinearities are so deep that it is impossibile for a large family of VAR models to either produce similar portfolio weights or to yield realized, ex-post out-of-sample long-horizon portfolio performances that may compete with those typical of bull and bear models. A typical investor with intermediate risk aversion and a 5-year horizon ought to be ready to pay an annual fee of up to 5.7 % to have access to forecasts of REIT returns that take their bull and bear dynamics into account instead of simpler, linear forecast.
| Item Type: | Journal Article | ||||||||
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| Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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| Journal or Publication Title: | Journal of Real Estate Finance and Economics | ||||||||
| Publisher: | Springer | ||||||||
| ISSN: | 0895-5638 | ||||||||
| Official Date: | July 2014 | ||||||||
| Dates: |
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| Volume: | 49 | ||||||||
| Number: | 1 | ||||||||
| Page Range: | pp. 116-164 | ||||||||
| DOI: | 10.1007/s11146-013-9411-6 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Restricted or Subscription Access |
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