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Ex-ante real estate Value at Risk calculation method

Author

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  • Charles-Olivier Amédée-Manesme

    (Université Laval)

  • Fabrice Barthélémy

    (Université de Versailles Saint-Quentin-en-Yvelines)

Abstract

The computation of Value at Risk (VaR) has long been a problematic issue in commercial real estate. Difficulties mainly arise from the lack of appropriate data, the lack of transactions, the non-normality of returns, and the inapplicability of many of the traditional methodologies. In addition, specific risks remain latent in investors’ portfolios and thus risk measurements based on market index do not represent the risks of a specific portfolio. Following a spate of new regulations such as Basel II, Basel III, NAIC and Solvency II, financial institutions have increasingly been required to estimate and control their exposure to market risk. Hence, financial institutions now commonly use “internal” VaR (or Expected Shortfall) models in order to assess their market risk exposure. This paper proposes the first model designed especially for static real estate VaR computation. The proposal accounts for specific real estate characteristics such that the lease structures or the vacancies. The paper contributes to the real estate risk management literature by proposing for the first time a model that incorporates characteristics of real estate investments. It allows more precise real estate risk measurements and is derived from a regulators’ approach.

Suggested Citation

  • Charles-Olivier Amédée-Manesme & Fabrice Barthélémy, 2018. "Ex-ante real estate Value at Risk calculation method," Annals of Operations Research, Springer, vol. 262(2), pages 257-285, March.
    • Handle: RePEc:spr:annopr:v:262:y:2018:i:2:d:10.1007_s10479-015-2046-7
    DOI: 10.1007/s10479-015-2046-7
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    More about this item

    Keywords

    Risk management; Value at Risk; Real estate finance; Vacancy; Lease;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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