Marketing Period Risk in a Portfolio Context: Comment and Extension |
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Authors: | Zhenguo Lin Yingchun Liu Kerry D Vandell |
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Institution: | (1) Fannie Mae, 3900 Wisconsin Avenue, Washington, DC 20016, USA;(2) The Paul Merage School of Business, University of California – Irvine, Irvine, CA 92697–3125, USA |
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Abstract: | This paper re-examines and extends the findings of Bond et al., Journal of Real Estate Finance and Economics, 34, 447–461, (2007) who consider the theoretical model of Lin and Vandell, Real Estate Economics, 35, 291–330, (2007) to determine the extent to which individual real estate asset return characteristics caused by marketing
period risk disappear in a large, diversified real estate portfolio. The effects of marketing period risk are found to disappear
in the limit with growth in the size of the portfolio, with ex ante variance approaching ex post variance, but only if the portfolio consists of nonsystematic risk alone, in which case both approach zero. The marketing period risk factor (MPRF), representing the ratio of ex ante to ex post variance, however, does not in general approach zero in the limit, in fact could increase or decrease depending upon the
illiquidity characteristics of the individual assets and the magnitude and degree of correlation among individual property
returns and marketing periods. The results suggest that even large institutional real estate portfolio managers must consider
the illiquidity present in their portfolios and cannot assume that its effect will be diversified away.
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Keywords: | Real estate Illiquidity Portfolio diversification Marketing period risk |
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