Is Real Estate a Good Way to Diversify in Times of Financial Crisis?
13 Pages Posted: 22 Aug 2011 Last revised: 26 Nov 2012
Date Written: August 22, 2011
This paper investigates the diversification benefits of indirect real estate investments in market downturns. We model the dependence structure between REITs and traditional assets by using a mixed-copula framework within a regime switching model. The Clayton copula dominates in the mixture. We showed that correlations increase during periods of high volatility and market stress. Indirect real estate investments do not provide an adequate level of downside protection and tend to increase the portfolio risk during times of crisis.
Keywords: real estate, equity market, regime switching models, hidden Markov chains, Copulas
JEL Classification: C14, G11
Suggested Citation: Suggested Citation