The economic value of using range-based volatility for international REIT diversification

Jian Zhou

Journal of Property Research, 2017, vol. 34, issue 2, 147-162

Abstract: Conditional volatility of financial assets can be estimated through either a return-based estimator or a range-based estimator. This paper investigates whether the range-based estimator can lead to economic benefits over a return-based benchmark. We take an asset-allocation perspective and compare the performances of an all-REIT international portfolio using the two estimators. We find that the portfolio constructed based on the range-based estimator significantly outperforms the one constructed based on the return-based estimator. This conclusion is robust to different portfolio performance measures and asset allocation periods. We also demonstrate the implementability of the range-based portfolio by showing that the economic value of using it is sufficient to compensate for transaction costs. Overall, our findings suggest that using range-based volatility adds value to international diversification among real estate markets.

Date: 2017
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DOI: 10.1080/09599916.2017.1344724

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