TIME-VARYING CORRELATIONS AND OPTIMAL PORTFOLIOS IN ASIAN REAL ESTATE SECURITIES MARKETS

Abstract

Many studies have addressed the benefits of international diversification. Low correlations between Asian real estate securities market could bring portfolio diversification benefits to the global investors. Owning to the effect of globalization, the markets are found to be more synchronized, and the correlations structure are changing over time. Thus, using unconditional correlations in the optimal portfolio model may cause misallocation of the assets. This study uses Dynamic Conditional Correlation (DCC) model to examine the time-varying conditional correlations between nine Asian markets, spanning a ten-year period from May 2000 to April 2010. The DCC estimates are found to be increasing over time, particularly after the global financial crisis in end of year 2007. This market behavior is commonly referring as the contagion effect. Also, the DCC estimates are used to compute the optimal portfolios, which are found to be sufficiently representing the market co-movements. The results from optimal portfolio prove that it remains viable to diversify into the Asian real estate securities markets. To address the home bias behavior of the investors, various restrictions on Asian emerging markets is tested. The study finds out that to include emerging markets could bring greater diversification benefits. A major proportion of the optimal portfolios are focused on emerging markets after the financial crisis. Therefore, in order to hedge against the greater fluctuation during financial crisis, investor might want to increases their fund allocation into Asian emerging market, as they offers lower correlations and higher returns comparing to the Asian developed markets.