The Importance of Considering Regimes in Long-term Asset Allocation to Real Estate

Massimo Guidolin, Mingwei (Max) Liang, Milena Petrova

No 26263, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We investigate the long-term, regime-dependent asset allocation of an investor’s wealth in a mixed-asset portfolio that includes publicly traded real estate. We show that augmenting standard VAR models with Markov-switching features not only improves predictive power for asset returns but also introduces economically meaningful horizon effects in optimal portfolio allocations. As the investment horizon lengthens, optimal portfolio allocations become less sensitive to the prevailing regime. Across initial states, the sensitivity of portfolio allocations to the investment horizon manifests primarily through a gradual reallocation toward risky assets relative to risk-free assets, particularly at lower levels of risk aversion. Public real estate receives economically meaningful portfolio allocations under these conditions. Out-of-sample portfolio tests further show that regime-switching models deliver higher realized utility and Sharpe ratios than linear and i.i.d. benchmarks. Overall, the results highlight the economic value of incorporating regime shifts into longterm portfolio choice and confirm the continued role of publicly traded real estate in mixedasset portfolios.

Keywords: REITs; regime switching; asset allocation; horizon effects (search for similar items in EconPapers)
Pages: 76
Date: 2026
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repec.unibocconi.it/baffic/baf/papers/cbafwp26263.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:baf:cbafwp:cbafwp26263

Access Statistics for this paper

More papers in BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy Via Röntgen, 1 - 20136 Milano - Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Michela Pozzi ().