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1 – 10 of over 4000This chapter focuses on examining how changes in the liquidity differential between nominal and TIPS yields influence optimal portfolio allocations in U.S. Treasury securities…
Abstract
This chapter focuses on examining how changes in the liquidity differential between nominal and TIPS yields influence optimal portfolio allocations in U.S. Treasury securities. Based on a nonparametric estimation technique and comparing the optimal allocation decisions of mean-variance and CRRA investor, when investment opportunities are time varying, I present evidence that liquidity risk premium is a significant risk-factor in a portfolio allocation context. In fact, I find that a conditional allocation strategy translates into improved in-sample and out-of-sample asset allocation and performance. The analysis of the portfolio allocation to U.S. government bonds is particularly important for central banks, specially in developing countries, given the fact that, collectively they have accumulate a large holdings of U.S. securities over the last 15 years.
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This paper re‐examines the role of real estate within mixed asset portfolios from the perspective of an Irish portfolio manager. The nature of the investment market in the…
Abstract
This paper re‐examines the role of real estate within mixed asset portfolios from the perspective of an Irish portfolio manager. The nature of the investment market in the Republic of Ireland leads to the study extending the existing literature by expanding the universe of assets beyond a solely domestic setting and by imposing constraints on the optimal portfolios. Irish funds generally hold proportionately more in international equities than in the domestic market due to the small and illiquid nature of the Irish market; therefore, unconstrained tests do not adequately model the behaviour of Irish portfolio managers. The study finds that while real estate plays an important role in both the domestic and international unconstrained portfolios, it exits the optimal portfolios at relatively low return levels. Additionally, the real estate series adjusted for smoothing fails to enter any of the optimal portfolios. However, the use of 20 per cent band constraints leads to an increase in the diversification role real estate can play in a mixed asset portfolio, with the asset maintaining a presence up to more acceptable return levels.
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The purpose of this paper is to study the scope for country diversification in international portfolios of mutual funds for the “core” EMU countries. The author uses a sample of…
Abstract
Purpose
The purpose of this paper is to study the scope for country diversification in international portfolios of mutual funds for the “core” EMU countries. The author uses a sample of daily returns for country indices of French, German and Italian funds to investigate the quest for international diversification. The author focuses on fixed-income mutual funds during the period of the financial market turmoil since 2007.
Design/methodology/approach
The author compute optimal portfolio allocations from both unconstrained and constrained mean-variance frameworks that take as input the out-of-sample forecasts for the conditional mean, volatility and correlation of country-level indices for funds returns. The author also applies a portfolio allocation model based on utility maximization with learning about the time-varying conditional moments. The author compares the out-of-sample forecasting performance of 12 multivariate volatility models.
Findings
The author finds that there is a “core” EMU country also for the mutual fund industry: optimal portfolios allocate the largest portfolio weight to German funds, with Italian funds assigned a lower weight in comparison to French funds. This result is remarkably robust across competing forecasting models and optimal allocation strategies. It is also consistent with the findings from a utility-maximization model that incorporates learning about time-varying conditional moments.
Originality/value
This is the first study on optimal country-level diversification for a mutual fund investor focused on European countries in the fixed-income space for the turmoil period. The author uses a large array of econometric models that captures the salient features of a period characterized by large changes in volatility and correlation, and compare the performance of different optimal asset allocation models.
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Property is a key investment asset class that offers considerable benefits in a mixed-asset portfolio. Previous studies have concluded that property allocation should be within…
Abstract
Purpose
Property is a key investment asset class that offers considerable benefits in a mixed-asset portfolio. Previous studies have concluded that property allocation should be within the 10-30 per cent range. However, there seems to be wide variation in theory and practice. Historical Australian superannuation data shows that the level of allocation to property asset class in institutional portfolios has remained constant in recent decades, restricted at 10 per cent or lower. This is seen by many in the property profession as a subjective measure and needs further investigation. The purpose of this paper is to compare the performance of the AU$431 billion industry superannuation funds’ strategic balanced portfolio against ten different passive and active investment strategies.
Design/methodology/approach
The analysis used 20 years (1995-2015) of quarterly data covering seven benchmark asset classes, namely: Australian equities, international equities, Australian fixed income, international fixed income, property, cash and alternatives. The 11 different asset allocation models are constructed within the modern portfolio theory framework utilising Australian ten-year bonds as the risk free rate. The Sharpe ratio is used as the key risk-adjusted return performance measure.
Findings
The ten different asset allocation models perform as well as the industry fund strategic approach. The empirical results show that there is scope to increase the property allocation level from its current 10-23 per cent. Upon excluding unconstrained strategies, the recommended allocation to property for industry funds is 19 per cent (12 per cent direct and 7 per cent listed). This high allocation is backed by improved risk-adjusted return performance.
Research limitations/implications
The constrained optimal, tactical and dynamic models are limited to asset weight, no short selling and turnover parameters. Other institutional constraints that can be added to the portfolio optimisation problem include transaction costs, taxation, liquidity and tracking error constraints.
Practical implications
The 11 different asset allocation models developed to evaluate the property allocation component in industry superannuation funds portfolio will attract fund managers to explore alternative strategies (passive and active) where risk-adjusted returns can be improved, compared to the common strategic approach with increased allocation to property assets.
Originality/value
The research presents a unique perspective of investigating the optimal allocation to property assets within the context of active investment strategies, such as tactical and dynamic models, whereas previous studies have focused mainly on passive investment strategies. The investigation of these models effectively contributes to the transfer of broader finance and investment market theories and practice to the property discipline.
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David Camilleri, Mohammad Iqbal Tahir and Samuel Wang
The purpose of this study is to provide further evidence on the importance of international diversification, and to determine the optimal allocation of assets in a portfolio…
Abstract
The purpose of this study is to provide further evidence on the importance of international diversification, and to determine the optimal allocation of assets in a portfolio comprising domestic (Australian) and international assets. The study focuses on stock index futures contracts in five countries ‐ Australia, USA, UK, Hong Kong and Japan. Daily data for the five selected contracts over the period from 1 January 1990 to 31 December 2000 is employed in the study. Consistent with previous studies, the results confirm the importance of international diversification and indicate that the portfolio risk is reduced considerably when more international assets are added sequentially to the portfolio. Empirical analysis also shows that the optimal asset allocation results in higher risk reduction and better returns when compared with an equally weighted portfolio.
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The paper uses 101 years of Chilean and international financial assets returns to investigate mean-variance optimal portfolio allocations. The key conclusion is that the share of…
Abstract
The paper uses 101 years of Chilean and international financial assets returns to investigate mean-variance optimal portfolio allocations. The key conclusion is that the share of international unhedged investments is substantial even in minimum risk portfolios (20%), unless the period 1980–2002 is assumed to be drawn from a different distribution and previous history is disregarded. In addition to that, the paper finds that mean-variance optimal investors would have generated substantial demand for an asset replicating the return profile of an efficient pay-as-you-go pension scheme. Labour income and departures from log-normality of returns might, however, affect the latter conclusion.
Aims to test to determine whether the selection of the historical return time interval (monthly, quarterly, semiannual, or annual) used for calculating real estate investment…
Abstract
Purpose
Aims to test to determine whether the selection of the historical return time interval (monthly, quarterly, semiannual, or annual) used for calculating real estate investment trust (REIT) returns has a significant effect on optimal portfolio allocations.
Design/methodology/approach
Using a mean‐variance utility function, optimal allocations to portfolios of stocks, bonds, bills, and REITs across different levels of assumed investor risk aversion are calculated. The average historical returns, standard deviations, and correlations (assuming different time intervals) of the various asset classes are used as mean‐variance inputs. Results are also compared using more recent data, since 1988, with, data from the full REIT history, which goes back to 1972.
Findings
Using the more recent REIT datarather than the full dataset results in optimal allocations to REITs that are considerably higher. Likewise, using monthly and quarterly returns tends to understate the variability of REITs and leads to higher portfolio allocations.
Research limitations/implications
The results of this study are based on the limited historical return data that are currently available for REITs. The results of future time periods may not prove to be consistent with the findings.
Practical implications
Numerous research papers arbitrarily decide to employ monthly or quarterly returns in their analyses to increase the number of REIT observations they have available. These shorter interval returns are generally annualized. This paper addresses the consequences of those decisions.
Originality/value
It has been shown that the decision to use return estimation intervals shorter than a year does have dramatic consequences on the results obtained and, therefore, must be carefully considered and justified.
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Stanley McGreal, Alastair Adair, James N. Berry and James R. Webb
Few countries have sufficiently long and detailed returns data for real estate to permit sophisticated analysis. This paper aims to examine the potential diversification of…
Abstract
Purpose
Few countries have sufficiently long and detailed returns data for real estate to permit sophisticated analysis. This paper aims to examine the potential diversification of private real estate investments using returns data for major regional centres in Ireland and the UK.
Design/methodology/approach
Optimal real estate‐only portfolios are constructed using total returns, income returns and appreciation returns for office and retail real estate in ten cities within Ireland and the UK. The analysis uses IPD data for the period 1984 to 2002. Total return, income return and appreciation returns are treated as separate asset streams in the modelling of portfolios.
Findings
The results show different risk levels; in particular the income stream carries low risk, whereas the capital appreciation element is much more volatile and risky. Optimal portfolios, office or retail, whether income, appreciation or total returns, indicate that provincial markets perform well and are capable of pushing London out of the optimised portfolios.
Research limitations/implications
Limitations stem from the optimal portfolios being based on return series without a consideration of market depth. Future research will seek to construct weighted portfolios.
Originality/value
The paper constructs optimal portfolios for three scenarios: low return; medium return; and high return across sectors, return streams and major regional centres in Ireland and the UK. The results show that regional centres perform well and can exclude London real estate from optimal portfolios.
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The purpose of this paper is to explore a regime switching asset allocation model that includes six major real estate security markets (USA, UK, Japan, Australia, Hong Kong and…
Abstract
Purpose
The purpose of this paper is to explore a regime switching asset allocation model that includes six major real estate security markets (USA, UK, Japan, Australia, Hong Kong and Singapore) and focuses on how the presence of regimes affects portfolio composition.
Design/methodology/approach
A Markov switching model is first developed to characterize real estate security markets’ risk‐return in two regimes. The mean‐variance portfolio construction methodology is then deployed in the presence of the two regimes. Finally, the out‐of‐sample analyzes are conducted to examine whether the regime switching allocation outperforms the conventional allocation strategy.
Findings
Strong evidence of regimes in the six real estate security markets in detected. The correlations between the various real estate security markets’ returns are higher in the bear market regime than in the bull market regime. Consequently the optimal real estate portfolio in the bear market regime is very different from that in the bull market regime. The out‐of‐sample tests reveal that the regime‐switching model outperforms the non‐regime dependent model, the world real estate portfolio and equally‐weighted portfolio from risk‐adjusted performance perspective.
Originality/value
The application of the Markov switching technique to real estate markets is relatively new and has great significance for international real estate diversification. With increased significance of international securitized property as a real estate investment vehicle for institutional investors to gain worldwide real estate exposure, this study provides significant insights into the investment behavior and optimal asset allocation implications of the listed real estate when returns follow a regime switching process.
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Martin Haran, Peadar Davis, Michael McCord, Terry Grissom and Graeme Newell
The purpose of the paper is to examine the role of securitised real estate within the confines of a multi‐asset investment portfolio and to identify if indeed securitised real…
Abstract
Purpose
The purpose of the paper is to examine the role of securitised real estate within the confines of a multi‐asset investment portfolio and to identify if indeed securitised real estate can afford investors the desired investment benefits of direct property investment whilst mitigating many of the recognised barriers and risks.
Design/methodology/approach
The paper employs a suite of analytical techniques; lead‐lag correlations are utilised to examine market dynamics between listed and direct real estate markets across jurisdictions. Grainger causality and co‐integration techniques are applied to examine the nature and extent of relationships between investment markets with optimal portfolio analysis utilised to explore the role of securitised real estate and the optimum weighting allocation within the confines of a multi‐asset investment portfolio.
Findings
The findings demonstrated the unresponsive nature of direct real estate markets relative to listed real estate markets – in some jurisdictions the extent of lag can be as much as 12 months. Whilst the research did not identify a Grainger causality relationship between listed and direct property markets across the jurisdictions, co‐integration analysis does infer trend reverting price behaviour in the long run (ten years) between direct and listed real estate markets. Optimal portfolio analysis serves to demonstrate the crucial role of real estate within a multi‐asset portfolio in terms of both mitigating risk and enhancing performance over the ten‐year time series. Indeed, the optimal portfolio analysis highlights the compatibility and complementarity of listed and direct real estate within a multi‐asset investment portfolio.
Originality/value
The question if securitised real estate is a viable proxy for direct property investment is as inconclusive as it is enduring. In contrast to the large embodiment of previous work, this paper adopts an international market perspective depicting the global nature of securitised real estate investment markets whilst also reflecting on the extent of co‐integration between asset classes and across jurisdictions during a period of extreme financial and economic distress.
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