The Stability of the Covariances of International Property Share Returns

This paper looks at the covariance structure of international property share returns. Portfolio models, which are used to generate efficient international asset allocations, require estimates of a covariance structure of asset returns as input. Usually, the realized structure is used as a proxy, but that is only valid if this structure is stable. We test for this stability. We find covariances of international property share returns to be unstable, while correlations are stable between some time-periods, and unstable between others. The results cast some doubts on the use of standard portfolio models for the allocation of international real estate portfolios.