Commercial real estate investments and the term structure of risk and return [Elektronische Ressource] / vorgelegt von Christian Rehring

Commercial Real Estate Investments
and the Term Structure of Risk and Return





DISSERTATION

zur Erlangung des Grades eines Doktors der Wirtschaftswissenschaft

eingereicht an der
Wirtschaftswissenschaftlichen Fakultät
der Universität Regensburg


vorgelegt von
Diplom-Kaufmann Christian Rehring


Berichterstatter:
Prof. Dr. Steffen Sebastian (Universität Regensburg)
Prof. Dr. Rolf Tschernig (Universität Regensburg)


Tag der Disputation: 15. Oktober 2010
Contents


List of Figures............................................................................................................... v
List of Tables ...............................................................................................................vi
List of Abbreviations...................................................................................................vii
List of Symbols.............................................................................................................ix

1 Introduction ........................................................................................................... 1

2 Dynamics of Commercial Real Estate Asset Markets, Return Volatility, and the
Investment Horizon................................................................................................ 6
2.1 Introduction................................................................................................... 7
2.2 Background and literature review .................................................................. 9
2.3 VAR model and data ................................................................................... 12
2.3.1 VAR specification ........................................................................... 12
2.3.2 Data................................................................................................. 13
2.3.3 VAR estimates................................................................................. 17
22.4 Multi-period volatility and R statistics........................................................ 21
2.4.1 Methodology ................................................................................... 21
2.4.2 Results............................................................................................. 22
2.5 Variance decompositions............................................................................. 28
2.5.1 Methodology ................................................................................... 28
2.5.2 Results............................................................................................. 30
2.6 Market efficiency ........................................................................................ 33
2.7 Conclusion .................................................................................................. 36
2.8 Appendix: Data ........................................................................................... 37

3 Real Estate in a Mixed Asset Portfolio: The Role of the Investment Horizon ....... 38
3.1 Introduction................................................................................................. 39
3.2 Literature review ......................................................................................... 41
3.2.1 Return predictability and mixed asset allocation .............................. 41
3.2.2 Illiquidity and transaction costs........................................................ 43
3.3 VAR model and data ................................................................................... 44 Contents iii
3.3.1 VAR specification ........................................................................... 44
3.3.2 Data................................................................................................. 45
3.3.3 VAR estimates................................................................................. 48
3.4 Horizon effects in risk and return of ex post returns..................................... 51
3.4.1 The term structure of risk................................................................. 51
3.4.2 The term structure of expected returns ............................................. 55
3.5 The term structure of real estate’s ex ante return volatility........................... 58
3.6 Horizon-dependent portfolio optimizations.................................................. 62
3.6.1 Mean-variance optimization ............................................................ 62
3.6.2 Mixed asset allocation results .......................................................... 62
3.6.3 The allocation to real estate under different asset allocation
approaches....................................................................................... 65
3.7 Robustness checks....................................................................................... 68
3.7.1 Smoothing parameter....................................................................... 68
3.7.2 Quarterly dataset.............................................................................. 70
3.8 Conclusion .................................................................................................. 73
3.9 Appendix A: Data........................................................................................ 74
3.10 Appendix B: Approximation (3.10a)............................................................ 75

4 Inflation-Hedging, Asset Allocation, and the Investment Horizon ........................ 77
4.1 Introduction................................................................................................. 78
4.2 Literature review ......................................................................................... 80
4.3 VAR model and data ................................................................................... 83
4.3.1 VAR specification ........................................................................... 83
4.3.2 Data................................................................................................. 84
4.3.3 VAR estimates................................................................................. 87
4.4 Horizon effects in risk and return for nominal and real returns..................... 90
4.4.1 The term structure of risk................................................................. 90
4.4.2 Inflation hedging ............................................................................. 94
4.4.3 The term structure of expected returns ............................................. 99
4.5 Horizon-dependent portfolio optimizations for nominal and real returns.... 101
4.5.1 Mean-variance optimization .......................................................... 101
4.5.2 Results........................................................................................... 103
4.6 Robustness of the results with regard to the smoothing parameter.............. 106 Contents iv
4.7 Conclusion ................................................................................................ 108
4.8 Appendix: Data ......................................................................................... 109

References ................................................................................................................ 110

List of Figures


Figure 2.1 The term structure of return volatilities................................................... 24
2
Figure 2.2 Implied R statistics................................................................................ 27

Figure 3.1 Total real return indexes......................................................................... 48
Figure 3.2 The term structure of return volatilities................................................... 53
Figure 3.3 The term structure of return correlations................................................. 55
Figure 3.4 The term structure of expected returns.................................................... 58
Figure 3.5 The term structure of real estate’s return volatility.................................. 60
Figure 3.6 Optimal portfolio compositions .............................................................. 64
Figure 3.7 Real estate allocation under different asset allocation approaches ........... 66

Figure 4.1 Total return and cost of living indexes.................................................... 87
Figure 4.2 The term structure of return volatilities................................................... 93
Figure 4.3 The term structure of return correlations................................................. 94
Figure 4.4 The term structure of inflation volatility ................................................. 96
Figure 4.5 Inflation hedge properties....................................................................... 97
Figure 4.6 The term structure of expected returns.................................................. 101
Figure 4.7 Optimal portfolio compositions ............................................................ 104




List of Tables


Table 2.1 Sample statistics..................................................................................