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Applying VaR to REITs: A comparison of alternative methods

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  • Lu, Chiuling
  • Wu, Sheng-Ching
  • Ho, Lan-Chih

Abstract

This study employs five methods to calculate the VaR of twelve REITs portfolios and evaluates the accuracy of these methods. Firstly, we find that the VaR varies among individual portfolios. The Hotel REITs has consistently the largest VaR. The low-leveraging portfolio tends to have the largest VaR measured by the parametric methods, while the high leveraging portfolio has the largest VaR calculated by the non-parametric methods. Secondly, each method performs differently at different confidence levels, and no method dominates the others. At the 95% confidence level, the EWMA method performs relatively well. The EQWMA and the two non-parametric methods perform equivalently and slightly overestimate VaRs. The EQWMAT method ranks the bottom and significantly overestimates VaRs for all portfolios. At the 99% confidence level, the EQWMA method performs the best. The EQWMAT and the two non-parametric methods perform equivalently and may overestimate VaR for all portfolios. The EWMA method turns out to be the worst and tends to underestimate the VaR. These findings may provide more insights for institutional real estate investors.

Suggested Citation

  • Lu, Chiuling & Wu, Sheng-Ching & Ho, Lan-Chih, 2009. "Applying VaR to REITs: A comparison of alternative methods," Review of Financial Economics, Elsevier, vol. 18(2), pages 97-102, April.
    • Handle: RePEc:eee:revfin:v:18:y:2009:i:2:p:97-102
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    References listed on IDEAS

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    Cited by:

    1. Jian Zhou, 2013. "Extreme risk spillover among international REIT markets," Applied Financial Economics, Taylor & Francis Journals, vol. 23(2), pages 91-103, January.
    2. Fahad Almudhaf, 2018. "Backtesting expected shortfall: evidence from European securitized real estate," Applied Economics Letters, Taylor & Francis Journals, vol. 25(3), pages 176-182, February.
    3. Leh-Chyan So & Jun-Yang Yu, 2015. "IMPROVED DETECTION OF RARE-EVENT RISK OF A PORTFOLIO WITH U.S. REITs," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 1-25, December.
    4. Tumellano Sebehela, 2016. "Portfolio Formation Memory," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(02), pages 1-16, June.
    5. Jian Zhou & Randy Anderson, 2012. "Extreme Risk Measures for International REIT Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 152-170, June.
    6. Zeno Adams & Roland Füss & Felix Schindler, 2015. "The Sources of Risk Spillovers among U.S. REITs: Financial Characteristics and Regional Proximity," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(1), pages 67-100, March.

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