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Investing for the Long-run in European Real Estate

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Abstract

We calculate optimal portfolio choices for a long-horizon, risk-averse investor who diversifies among European stocks, bonds, real estate, and cash, when excess asset returns are predictable. Simulations are performed for scenarios involving different risk aversion levels, horizons, and statistical models capturing predictability in risk premia. Importantly, under one of the scenarios, the investor takes into account the parameter uncertainty implied by the use of estimated coefficients to characterize predictability. We find that real estate ought to play a significant role in optimal portfolio choices, with weights between 12 and 44%. Under plausible assumptions, the welfare costs of either ignoring predictability or restricting portfolio choices to traditional financial assets only are found to be in the order of 150–300 basis points per year. These results are robust to changes in the benchmarks and in the statistical framework.

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Authors and Affiliations

  1. CeRP, Collegio Carlo Alberto, Via Real Collegio, 30 Moncalieri, Turin, 10024, Italy

    Carolina Fugazza, Massimo Guidolin & Giovanna Nicodano

  2. Federal Reserve Bank of St. Louis Broadway and Locust Sts., PO Box 442, St. Louis, MO, 63166-0442, USA

    Massimo Guidolin

  3. Faculty of Economics, University of Turin, Corso Unione Sovietica, 218bis, Turin, 10134, Italy

    Giovanna Nicodano

  4. Fondazione Collegio Carlo Alberto, Via Real Collegio, 30 Moncalieri, Turin, 10024, Italy

    Giovanna Nicodano

Authors
  1. Carolina Fugazza
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  2. Massimo Guidolin
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  3. Giovanna Nicodano
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Fugazza, C., Guidolin, M. & Nicodano, G. Investing for the Long-run in European Real Estate. J Real Estate Finan Econ 34, 35–80 (2007). https://doi.org/10.1007/s11146-007-9002-5

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  • DOI: https://doi.org/10.1007/s11146-007-9002-5

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