REITs in a Mixed-Asset Portfolio:An Investigation of Extreme Risks

Abstract

Until the recent financial crisis, it was widely believed that adding real estate investment trusts (REITs) to a mixed-asset portfolio expanded the efficient frontier and provided superior risk-adjusted returns. More recent evidence suggests that REITs may have higher volatility, Value at Risk (VaR), and expected shortfall (ES) than equities in times of increased market volatility, precisely when the stabilizing properties of REITs are most desirable. This study expands on the emerging literature with two contributions. First, it examines the impact of REITs on the VaR of a portfolio of stocks and bonds over the last two decades. Second, a new, more accurate method of estimating VaR, Conditional Autoregressive Value at Risk (CAViaR), is used. The more accurate VaR estimates show that adding REITs to the portfolio has no significant impact on VaR until after the financial crisis begins. After the financial crisis begins, adding REITs to a portfolio of stocks and bonds dramatically increases VaR. The results have significant implications for portfolio selection.