Advanced REIT Portfolio Optimization: Innovative Tools for Risk Management

268 Pages·2022·14.697 MB·English

by  W. Brent Lindquist, Svetlozar T. Rachev, Yuan Hu, Abootaleb Shirvani

Dynamic Modeling and Econometrics in
Economics and Finance 30
W. Brent Lindquist
Svetlozar T. Rachev
Yuan Hu
Abootaleb Shirvani
Advanced
REIT Portfolio
Optimization
Innovative Tools for Risk Management
Dynamic Modeling and Econometrics in
Economics and Finance
Volume 30
SeriesEditors
StefanMittnik,DepartmentofStatistics,LudwigMaximilianUniversityofMunich,
Munich,Germany
WilliSemmler,NewSchoolforSocialResearch,BielefeldUniversity,Germany
NewSchoolforSocialResearch,NY,USA
In recent years there has been a rapidly growing interest in the study of dynamic
nonlinear phenomena in economic and financial theory, while at the same time
econometricians and statisticians have been developing methods for modeling
such phenomena. Despite the common focus of theorists and econometricians,
bothlinesofresearchhavehad theirown publication outlets. The new book series
is designed to further the understanding of dynamic phenomena in economics and
finance by bridging the gap between dynamic theory and empirics and to provide
cross-fertilizationbetweenthetwostrands.Theserieswillplaceparticularfocuson
monographs,surveys,editedvolumes,conferenceproceedingsandhandbookson:
(cid:129) Nonlineardynamicphenomenaineconomicsandfinance,includingequilibrium,
disequilibrium, optimizing and adaptive evolutionary points of view; nonlinear
andcomplexdynamicsinmicroeconomics,finance,macroeconomicsandapplied
fieldsofeconomics.
(cid:129) Econometric and statistical methods for analysis of nonlinear processes in eco-
nomics and finance, including computational methods, numerical tools and
softwaretostudynonlineardependence,asymmetries,persistenceoffluctuations,
multipleequilibria,chaoticandbifurcationphenomena.
(cid:129) Applications linking theory and empirical analysis in areas such as
macrodynamics, microdynamics, asset pricing, financial analysis and portfolio
analysis,internationaleconomics,resourcedynamicsandenvironment,industrial
organizationanddynamicsoftechnicalchange,laboreconomics,demographics,
populationdynamics,andgametheory.
Thetargetaudienceofthisseriesincludesresearchersatuniversitiesandresearch
and policy institutions, students at graduate institutions, and practitioners in eco-
nomics,financeandinternationaleconomicsinprivateorgovernmentinstitutions.
Alltitlesinthisseriesarepeer-reviewed.TheseriesisindexedinScopus.
(cid:129) (cid:129)
W. Brent Lindquist Svetlozar T. Rachev
(cid:129)
Yuan Hu Abootaleb Shirvani
Advanced REIT Portfolio
Optimization
Innovative Tools for Risk Management
W.BrentLindquist SvetlozarT.Rachev
DepartmentofMathematics DepartmentofMathematics
andStatistics andStatistics
TexasTechUniversity TexasTechUniversity
Lubbock,TX,USA Lubbock,TX,USA
YuanHu AbootalebShirvani
DepartmentofMathematics DepartmentofMathematics
UniversityofCaliforniaSanDiego KeanUniversity
LaJolla,CA,USA Union,NJ,USA
ISSN1566-0419 ISSN2363-8370 (electronic)
DynamicModelingandEconometricsinEconomicsandFinance
ISBN978-3-031-15285-6 ISBN978-3-031-15286-3 (eBook)
https://doi.org/10.1007/978-3-031-15286-3
©TheEditor(s)(ifapplicable)andTheAuthor(s),underexclusivelicensetoSpringerNatureSwitzerland
AG2022
Thisworkissubjecttocopyright.AllrightsaresolelyandexclusivelylicensedbythePublisher,whether
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transmission or information storage and retrieval, electronic adaptation, computer software, or by
similarordissimilarmethodologynowknownorhereafterdeveloped.
Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublication
doesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant
protectivelawsandregulationsandthereforefreeforgeneraluse.
The publisher, the authors, and the editorsare safeto assume that the adviceand informationin this
bookarebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsor
theeditorsgiveawarranty,expressedorimplied,withrespecttothematerialcontainedhereinorforany
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Foreword
This book offers a scholarly presentation of the premises and applications of the
mathematicsoftheproprietarysoftwareofJantzAnalytics,LLP.TheJantzmodels
focusonpubliclytradedstocksofrealestateinvestmenttrusts(REITs).Specifically,
themodelsprovidehighlyadvancedanalyticsforREITportfoliooptimization.The
Jantzmodelsprovidethefollowingtoolset:
(cid:129) Portfolio optimization strategies incorporating tail-risk assessment, day-ahead
return forecasting, turnover and performance attribute constraints, benchmark
tracking,andinvestorviewinput
(cid:129) Backtesting
(cid:129) A spectrum of risk-assessment tools augmenting traditional risk measures with
earlywarningsystemsandriskbudgeting
(cid:129) Optionvaluation
(cid:129) Inclusionofenvironmental,social,andgovernanceratingsinportfoliooptimiza-
tionandoptionpricing
These tools are employed within a unified framework consistent with dynamic
asset pricing (rational finance). The Jantz software is unique among existing
portfolio-optimization platforms. Many such platforms are based on historical per-
formance,buttheJantzsoftwareispredictive.AllJantzforecastingandriskmodels
areconsistentwiththeregulatoryrequirementsinBaselIIandBaselIII.Inshort,we
believe the Jantz software reflects the “state of the science” in portfolio optimiza-
tion,riskanalysis,andoptionvaluation.
The expertise of the Jantz team is multidimensional. It represents a unique
combinationofbusinessknowledge,realestateexperience,andworld-classmathe-
matical and statistical credentials. The cofounders of Jantz have over 80 years of
combined valuation and consulting experience in real estate throughout the United
StatesandPuertoRico.Thisexperience includesvirtuallyallproperty types.Their
clients have included commercialbanks, pension funds, various public-sector enti-
ties,andinvestmentbanks.
v
vi Foreword
Dr. Svetlozar (Zari) Rachev is one of the world’s foremost authorities on the
applicationofheavy-taileddistributionsinfinance.Heisacofounderandformerly
the president of Bravo Risk Management Group, which originated the Cognity
methodology. Bravo was acquired by FinAnalytica, where Zari served as chief
scientist. Dr. W. Brent Lindquist is a computational mathematician with 40 years
ofexperienceindevelopingnumericalmethods.Heisacofounderofthecompany
that marketed the Frontier package used in oil reservoir simulation and has com-
mercially licensed his 3DMA-Rock code for studying flow at pore scales.
Dr. Abootaleb Shirvani is an expert in Lévy subordinated processes applied to
finance. Dr. Yuan Hu’s expertise is in option pricing in complete markets with
non-Gaussianreturns.
Weanticipatethatthereadershipofthisbookwillbenotonlymathematicaland
statisticalexpertsbutalsomanagement-levelprofessionalswithoutdeepknowledge
ofthemathematicspresented.Toassistinthelatter’scomprehension,asummaryof
contentinnonmathematicaltermsispresentedasanabstractprecedingeachchapter.
JantzAnalytics,Dallas,TX,USA StephenT.Crosson
JantzAnalytics,Plano,TX,USA JimmyH.Jackson
About This Book
This book provides an investor-friendly presentation of the premises and applica-
tions of the quantitative finance models governing investment in one asset class of
publiclytradedstocks,specificallyrealestateinvestmenttrusts(REITs).Themodels
providehighlyadvancedanalyticsforREITinvestment,including:
(cid:129) Portfoliooptimizationusingbothhistoricandpredictivereturnestimation
(cid:129) Modelbacktesting
(cid:129) Acompletespectrumofriskassessmentandmanagementtoolswithanemphasis
onearlywarningsystems,riskbudgeting,estimatingtailrisk,andfactoranalysis
(cid:129) Derivativevaluation
(cid:129) IncorporatingESGratingsintoREITinvestment
Thesequantitativefinancemodelsarepresentedinaunifiedframeworkconsistent
withdynamicassetpricing.Givenitsscopeandpracticalorientation,thisbookwill
appeal to investors interested in portfolio optimization and innovative tools for
investmentriskassessment.
vii
Contents
1 TheRealEstateInvestmentMarket:TheCurrentStateandWhy
AdvancesAreNeeded. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2 TheData. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.1 REITAssetDescriptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.1.1 DomesticREITs. . . . . . . . . . . . . . . . . . . . . . . . .. . . . 13
2.1.2 InternationalREITs. . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.2 RealEstateStockDescriptions. . . . . . . . . . . . . . . . . . . . . . . . . 21
2.3 Benchmarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.3.1 Indices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.3.2 ExchangeTradedFunds. . . . . . . . . . . . . . . . . . . . . . . 24
2.3.3 MutualFunds. . . . .. . . . .. . . . .. . . . .. . . . .. . . . .. 24
2.4 AdditionalAssetsandIndices. . . . . . . . . . . . . . . . . . . . . . . . . 25
2.5 DataObservations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3 ModernPortfolioTheory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.1 ReturnTimeSeries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2 MPT-BasedPortfolios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.2.1 MarkowitzMean-VariancePortfolio. . . . . . . . . . . . . . 32
3.2.2 CapitalMarketLineandtheMarkowitz
Mean-VarianceTangentPortfolio. . . . . . . . . . . . . . . . 35
3.2.3 CVaR-MinimizingPortfolios. . . . . . . . . . . . . . . . . . . 37
3.2.4 CapitalMarketLineandtheCVaRαTangent
Portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.2.5 CriticismsofMean-VarianceOptimization. . . . . . . . . . 42
3.3 Black–LittermanModel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.4 HistoricalOptimization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ix
x Contents
4 HistoricalPortfolioOptimization:DomesticREITs. . . . . . . . . . . . . 49
4.1 BasicStrategies,Price,andReturnPerformance. . . . . . . . . . . . 50
4.1.1 Long-OnlyStrategy. . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.1.2 Jacobsetal.Long–ShortStrategy. . . . . . . . . . . . . . . . 52
4.1.3 Lo–PatelLong–ShortStrategy. . . .. . . . . . .. . . . . . .. 53
4.1.4 Long–ShortMomentumStrategy. . . . . . . . . . . . . . . . . 55
4.2 PerformanceUnderTurnoverConstraints. . . . . . . . . . . . . . . . . 56
4.3 Performance–RiskMeasures. . . . . . . . . . . . . . . . . . . . . . . . . . 63
4.4 Observations. .. . . . .. . . . . .. . . . . .. . . . . .. . . . . .. . . . . .. 70
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
5 DiversificationwithInternationalREITs. . . . . . . . . . . . . . . . . . . . . 73
5.1 InternationalPortfolioPerformance. . . . . . . . . . . . . . . . . . . . . 74
5.1.1 Long-OnlyInternationalPortfolios. . . . . . . . . . . . . . . 74
5.1.2 Jacobsetal.Long–ShortInternationalPortfolios. . . . . 77
5.1.3 Lo–PatelLong–ShortInternationalPortfolios. . . . . . . . 80
5.2 GlobalPortfolioPerformance. . . . . . . . . . . . . . . . . . . . . .. . . . 80
5.2.1 Long-OnlyGlobalPortfolios. . . . . . . . . . . . . . . . . . . . 80
5.2.2 Jacobsetal.Long–ShortGlobalPortfolios. . . . . . . . . . 85
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
6 Black–LittermanOptimizationResults. . . . . . . . . . . . . . . . . . . . . . 87
6.1 DomesticPortfolios. .. . . . . . . . . .. . . . . . . . . .. . . . . . . . .. . 87
6.2 GlobalPortfolios. . . . .. . . . . . .. . . . . . .. . . . . . .. . . . . . . .. 90
7 DynamicPortfolioOptimization:BeyondMPT. . . . . . . . . . . . . . . . 93
7.1 DynamicOptimization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
7.1.1 ARMA(1,1)–GARCH(1,1)withStudent’s
t-Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
7.1.2 Multivariatet-Distributionandt-Copulas. . . . . . . . . . . 96
7.1.3 GenerationofDynamicReturns. . . . . . . . . . . . . . . . . 96
7.1.4 CombiningtheDynamicApproachwith
Black–LittermanOptimization. . . . . . . . . . . . . . . . . . 98
7.2 PortfolioOptimizationUsingDynamicReturns. . . . . . . . . . . . . 99
7.2.1 DynamicLong-OnlyPortfolios. . . . . . . . . . . . . . . . . . 99
7.2.2 DynamicJacobsetal.Long–ShortPortfolios. . . . . . . . 105
7.2.3 DynamicLo–PatelLong–ShortPortfolios. . . . . . . . .. 108
7.3 DynamicOptimizationwiththeBlack–LittermanModel. . . . . . 110
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
8 Backtesting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
8.1 VaRTests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
8.1.1 BinomialTest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
8.1.2 TrafficLightTest. . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
8.1.3 Kupiec’sTests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
8.1.4 Christoffersen’sTests. . . . . . . . . . . . . . . . . . . . . . . . . 119