Downside-Sensitive Portfolio Optimization and Risk Overlays for Real Estate Securities

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Authors: Dilmi C. W. Hettiachchi-Halpe-Kankanamalage, Abootaleb Shirvani, Nicholas Appiah, Svetlozar T. Rachev, W. Brent Lindquist, Frank J. Fabozzi
Cited by: 1
References: 34

Abstract

We employ an empirical framework for real estate securities that incorporates portfolio optimization, return distribution tail diagnostics, risk metrics, modeling of long-range dependence in return volatility, regression against benchmark indices, and option pricing, treating these as necessary layers of a risk-management structure that concentrates on downside risk. Optimization compared mean–variance against downside-sensitive conditional value at risk. Tail behavior was assessed via skewness, kurtosis, and extreme value theory; volatility persistence was examined using ARMA–FIGARCH models. Benchmark dependence was examined via the capital asset pricing model (CAPM), employing endogenous and exogenous market proxies. Insurance instruments via European options were priced using a doubly subordinated normal inverse Gaussian pricing model capable of modeling skewed, heavy-tailed return distributions. Significant findings for the optimized portfolios include return distributions with losses that are heavier-tailed than gains; a transition in time from moderate-to-high long-range dependence in conditional volatility; smaller values of CAPM “alpha” and “beta” for minimum-risk portfolios compared to tangent portfolios; and significant implied volatility values.

Fields of Study & Subjects

Risk and Portfolio Optimization Stochastic processes and financial applications Housing Market and Economics

Publication details

Journal / source
Journal of risk and financial management
Publisher
MDPI AG
Volume
19
Issue
6
Pages
385–385
Publication date
26 May 2026
Language
EN