Abstract:
It is reasonable to suggest that a portfolio manager with direct property diversified by sector or region
is more interested in strategic than in tactical asset allocation.However,even with strategic allocations
of property the portfolio manager needs a regular monitoring of the inter-relationships amongst
assets comprising the portfolio to ensure that unexpected events do not 'permanently' alter such relationships.
One procedure for ascertaining whether assets are inter-related over the long run (and therefore
offer few diversification benefits)is through cointegration analysis.A difficulty with conventional
cointegration analysis,however,is that it is unable to accommodate changes in equilibrium relationships
that might occur due to unexpected structural changes.In this paper we apply the Gregoryand
Hansen cointegration procedure to consider how unexpected structural changes might affect the
potential long run diversification benefits of assets held in an Australian property portfolio.
