Real Estate Portfolio Management: Optimization under Risk Aversion

Fabrice Barthélémy () and Jean-Luc Prigent

No 2011-12, THEMA Working Papers from THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise

Abstract: This paper deals with real estate portfolio optimization when investors are risk averse. In this framework, we determine several types of optimal times to sell a diversified real estate and analyze their properties. The optimization problem corresponds to the maximization of a concave utility function defined on the terminal value of the portfolio. We extend previous results (Baroni et al., 2007, and Barthélémy and Prigent, 2009), established for the quasi linear utility case, where investors are risk neutral. We consider four cases. In the first one, the investor knows the probability distribution of the real estate index. In the second one, the investor is perfectly informed about the real estate market dynamics. In the third case, the investor uses an intertemporal optimization approach which looks like an American option problem. Finally, the buy-and-hold strategy is considered. For these four cases we analyze numerically the solutions that we compare with those of the quasi linear case. We show that the introduction of risk aversion allows to better take account of the real estate market volatility. We also introduce the notion of compensating variation to better compare all these solutions.

Keywords: Real estate portfolio; Optimal holding period; Risk aversion; Real estate market volatility (search for similar items in EconPapers)
JEL-codes: C61 G11 R21 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-upt and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2011-12

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