Structural Breaks and Cross-Continental Real Estate Securities Diversification: Evidence From Spanning Tests

Abstract

This study uses mean-variance spanning tests to examine the role of Asian and European real estate securities in real estate-only portfolios from a U.S. investor’s perspective. The results show that including overseas real estate securities helps enhance the meanvariance efficient frontier only when the portfolio does not include direct real estate assets. Furthermore, the diversification benefit of investing in Asian real estate stocks appears only in the vintage REIT era; it disappears in the new REIT era and after the Asian financial crisis. Moreover, after stripped out the equity market influence from international real estate stocks, the results indicate that trading noise in the equity markets could cause real estate stocks to deviate from their real estate fundamentals and thus reduce the diversification benefits to U.S. real estate investors.