Downside Risk to Real Estate Essay Example | Topics and Well Written Essays - 5250 words

Downside Risk to Real Estate - Essay Example The analysis includes independent variables drawn from a database and includes variables to adjust results for the impact of macroeconomic factors. In addition, indexes for the broader markets are identified and included in the regressions to adjust for the impact of trends in the general market. Investment in Listed Property Trusts (LPTs) or Real Estate Investment Trusts (REITs) has traditionally considered risk as an important factor. Numerous studies on risk have also demonstrated that REIT's financial condition and management structure have implications for its risk. Most of these studies have utilised the cross-sectional difference of REIT financial conditions and REIT management structure in estimating the relationship between these variables and risk. A REIT's risk is measured by the beta coefficient in the Capital Asset Pricing Model (CAPM) in which it is measured in a variance framework. However, the appropriateness of using CAPM in particular the use of beta as risk measure has been debated in recent years. In fact, several studies suggest downside systematic risk (downside beta) is comparatively better than systematic risk for measuring market-related risk for an asset in line with the theoretical superiorities of downside risk. Downside risk was first introduced by Roy (1952) primarily based on the safety first rule. It appears as a more intuitively appealing and secure risk measure compared to variance for several reasons such as downside risk does not require an assumption about the return distribution of an asset; it is more consistent with the investor's expected utility function and combining information provided by variance and skewness into one measure (Nawrocki, 1999, Estrada, 2002). Hogan and Warren (1974) and Bawa and Linderberg (1977) also demonstrated that downside risk (lower partial moment) can be generalised into CAPM and they developed a Mean-lower Partial Moment Capital Asset Pricing Model (MLPM-CAPM). The results from Price