 ALTERNATIVE INVESTMENTS: CORRELATION STRUCTURE AND BUSINESS CYCLESKeith Elliott and Gianluca Marcato () ERES from European Real Estate Society (ERES) Abstract: In an asset allocation process, correlations are particularly important if one includes 'alternative investments' such as real estate, commodities and hedge funds, which have been proclaimed to provide diversifying benefits within the overall portfolio context. While many studies have found that correlations between assets are time-dependent within each asset class, we focus on the correlations between asset classes to see if they change over time as a result of the business cycle. The technique of semi-correlation is used in order to differentiate asset class returns between up- and down-movements. We find that there are a number of assets for which correlations generally increase in down states (e.g. all types of equities). Hedge funds and balanced commodities also show substantially higher correlations to most other assets in down states. Furthermore, we find that gilts are the only asset class that becomes less correlated to most other assets during down markets, thus confirming their importance as a key diversifier in a multi-asset portfolio. Finally, once real estate indexes are adjusted to account for smoothing, we show that several correlation coefficients increase, suggesting that original time series may be overstating the benefits of diversification. JEL-codes: R3 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:arz:wpaper:eres2010_269 Access Statistics for this paper More papers in ERES from European Real Estate Society (ERES) Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.