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Paper eres2010_269:
ALTERNATIVE INVESTMENTS: CORRELATION STRUCTURE AND BUSINESS CYCLES

id eres2010_269
authors Elliott, Keith; Marcato, Gianluca
year 2010
title ALTERNATIVE INVESTMENTS: CORRELATION STRUCTURE AND BUSINESS CYCLES
source 17th Annual European Real Estate Society Conference in Milan, Italy
summary In an asset allocation process, correlations are particularly important if one includes 'alternative investments' such as real estate, commodities and hedge funds, which have been proclaimed to provide diversifying benefits within the overall portfolio context. While many studies have found that correlations between assets are time-dependent within each asset class, we focus on the correlations between asset classes to see if they change over time as a result of the business cycle. The technique of semi-correlation is used in order to differentiate asset class returns between up- and down-movements. We find that there are a number of assets for which correlations generally increase in down states (e.g. all types of equities). Hedge funds and balanced commodities also show substantially higher correlations to most other assets in down states. Furthermore, we find that gilts are the only asset class that becomes less correlated to most other assets during down markets, thus confirming their importance as a key diversifier in a multi-asset portfolio. Finally, once real estate indexes are adjusted to account for smoothing, we show that several correlation coefficients increase, suggesting that original time series may be overstating the benefits of diversification.
keywords Portfolio ManagementAlternative InvestmentsCorrelation
series ERES:conference
email k.e.w.elliott@reading.ac.uk
content file.pptx (1,522,866 bytes)
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ratings
session doctoral
last changed 2010/07/16 14:16
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