How Does the Ledoit and Wolf Shrinkage Estimator Improve a Real Estate Portfolio?
Vu Anh Tuan, Eric (2013), How Does the Ledoit and Wolf Shrinkage Estimator Improve a Real Estate Portfolio?, The Journal of Real Estate Portfolio Management, 19, 1, p. 89-101
TypeArticle accepté pour publication ou publié
Journal nameThe Journal of Real Estate Portfolio Management
American Real Estate Society
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Author(s)Vu Anh Tuan, Eric
Abstract (EN)Portfolio theories are meant to provide a method for managing assets and constructing portfolios. Meanwhile, the mean-variance technique has been heavily criticized by some academics, and its application to real estate portfolio is questionable (Cheng and Liang, 2000). Indeed, the mean-variance analysis is quite sensitive to estimation errors, and traditional real estate databases can represent a huge pitfall to portfolio construction. Therefore, we look for a method to lessen the effect of inputs upon the optimization process; the shrinkage estimator appears to show some advantages in modeling real estate portfolios. This study employs the shrinkage estimator scheme of Ledoit and Wolf (2004) to examine the effect of a corner solution on the allocations. This process limits the impact of estimation errors on the optimization process, resulting in a distinctive investment strategy.
Subjects / KeywordsLedoit and Wolf Shrinkage Estimator; Real Estate Portfolio; Real estate investment; Asset allocation; Portfolio management; Portefeuille immobilier; Investissements immobiliers; Allocation d'actifs; Gestion de portefeuille
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