Proceedings of the 18th International Academic Conference, London

PORTFOLIO OPTIMIZATION OF GLOBAL REITS RETURNS: HIGH-DIMENSIONAL COPULA-BASED APPROACH

ROENGCHAI TANSUCHAT

Abstract:

The objectives of this paper are to investigate the optimum portfolio of REIT index return of Asia – Pacific, Europe, USA, and emerging markets with multivariate t copula based on GARCH model, and to measure portfolio risk with value at risk (VaR) and component VaR (CVaR). The 1,454 REIT price index return observations were collected from 1 Dec 2009 to 29 June 2015 and calculated based on a continuous compound basis. The empirical results showed that the estimated equations of USA, Europe and emerging REIT index returns were ARMA(2,2)-GARCH(1,1), while ASIA-Pacific was ARMA(3,3)-GARCH(1,1). The coefficients of t distribution of these equations were also statistically significant at 1%, meaning the assumption of t distribution for ARMA-GARCH estimation was reasonable. Then, the multivariate t copula was used to construct an optimized portfolio for high dimensional risk management. The Monte Carlo simulation was applied in order to construct the optimized portfolio by using the mean-CVaR model at the given significance level of 5% and to obtain the efficient frontier of the portfolio under different expected returns. Finally, the optimal weights of the portfolio were obtained with the various expected returns in frontier.

Keywords: REITs, Portfolio Optimization, Multivariate t Copula, CVaR

DOI: 10.20472/IAC.2015.018.122

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