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Correlation Shifts and Real Estate Portfolio Management

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  • Stephen Lee

Abstract

Executive Summary. The success of any diversification strategy depends on the quality of the estimated correlation between assets. It is well known, however, that there is a tendency for the average correlation among assets to increase when the market falls and vice-versa. This suggests that correlation shifts can be modeled as a function of the market return. This is the idea behind the model Spurgin, Martin and Schneeweis (2000), which models the systematic risk, of an asset as a function of the returns in the market. In this paper the Spurgin et al. model is applied to monthly data in the United Kingdom over the period 1987:1 to 2000:12. The results show that a number of market segments display significant negative correlation shifts, while others show significantly positive correlation shifts.

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  • Stephen Lee, 2003. "Correlation Shifts and Real Estate Portfolio Management," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 9(1), pages 45-57, January.
    • Handle: RePEc:taf:repmxx:v:9:y:2003:i:1:p:45-57
    DOI: 10.1080/10835547.2003.12089671
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