| Abstract: |
In this paper, we re-examine the benefits of holding a portfolio of
international real estate securities in the light of evidence of growing
co-movement of securitised asset returns across markets. Do diversification
benefits depend on how integrated or independent the firms and countries are
at global or regional level? Specifically, can more risk reduction be achieved
through holding international diversified investments in segmented markets
rather than co-integrated markets? If so, is it possible to identify the
extent of this effect, hence informing global investor strategy, particularly
in the light of a growing integration within global securities markets? The
paper develops studies such as Wilson and Zurbruegg (2003), Gerlach et al.
(2006) and Gallo and Zhang (2010) in focussing on the cointegration between
markets, but extends that work in seeking to identify the sources of
difference and in investigating the impact of cointegration on the sensitivity
of asset returns to factor risks. Cointegration is captured using a variety of
techniques: ADF, PP, KPSS and Zivot and Andrews. From these tests, we produce
two portfolios of “cointegrated� and “independent� indices and assess
whether they differ in terms of risk-adjusted return. We examine Sharpe ratios
and sensitivity to systematic risk, using a range of multi-factor models,
decompose portfolio risk using a Fama-Macbeth approach and apply a canonical
approach to test sensitivity to macro-economic and financial risk factors. The
paper utilises data from GPR’s international real estate company database.
Monthly returns 1997 to 2011 from individual firms are aggregated to produce
value-weighted indices for 19 countries) and five regions. We also examine
company returns by sector and, separately, examine firms that are based or
predominantly invested in international financial centres. In the analysis
presented here, we focus on results for US$ returns, although local currency
returns are reported.The results indicate substantial differences in factor
sensitivity and risk between the cointegrated and independent portfolios
although benefits from risk sensitivity may be offset by lower aggregate
performance. We re-examine the results for different time periods and for
sector-specific company indices and, finally, examine the results for
companies focussed in global financial centres. Differences in the results
shed light on the sources of integration and systematic risk. |