Correlation Shifts and Real Estate Portfolio Management

Stephen Lee

Journal of Real Estate Portfolio Management, 2003, vol. 9, issue 1, 45-57

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.

Date: 2003
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DOI: 10.1080/10835547.2003.12089671

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