Smoothing and Implications for Asset Allocation Choices

35 Pages Posted: 11 Apr 2015

See all articles by Gianluca Marcato

Gianluca Marcato

Henley Business School - University of Reading

Tony Key

City University London - The Business School

Date Written: April 28, 2007

Abstract

An extensive literature on smoothing issues in real estate markets has been published, covering a range of theoretical techniques, applications to indices and asset allocation. A recent paper by Geltner et al [2002] reviewed the main theoretical approaches to the construction of unsmoothing algorithms. This paper focuses on the practical implications of unsmoothing model selection and calibration for asset allocation decisions in the UK, US and Australian markets and sheds light upon contradictory results in previous literature – Stevenson [2004].

We find that different unsmoothing techniques yield very similar asset allocation choices. Identified portfolio weights are much more sensitive to the unsmoothing parameter than to the unsmoothing method. We conclude that research on smoothing should focus on the identification of the best parameter rather than on the specification of the model to be used. Finally our results are empirically in line with previous literature on the level of the unsmoothing parameter. Moreover current weights of asset classes in institutional portfolios suggest a parameter maximising the portfolio’s Sharpe ratio similar to the one identified in previous literature. This result has also an implication on the implied volatility of real estate markets.

Keywords: smoothing, asset allocation, real estate

Suggested Citation

Marcato, Gianluca and Key, Tony, Smoothing and Implications for Asset Allocation Choices (April 28, 2007). Journal of Portfolio Management, Vol. 33, No. 5, 2007, Available at SSRN: https://ssrn.com/abstract=2592520

Gianluca Marcato (Contact Author)

Henley Business School - University of Reading ( email )

Department of Real Estate & Planning
Reading, RG6 6UD
United Kingdom
+44 (0)118 3788178 (Phone)
+44 (0)118 3788172 (Fax)

Tony Key

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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