Time Variation in Diversification Benefits of Commodity, REITs, and TIPS

Jing zhi Huang, Zhaodong Ken Zhong

Research output: Contribution to journalArticlepeer-review

37 Scopus citations


Diversification benefits of three "hot" asset classes-Commodity, Real Estate Investment Trusts (REITs), and Treasury Inflation-Protected Securities (TIPS)-are well-studied on an individual basis and in a static setting. Using data from 1970 to 2010, this paper documents both that the three asset classes are in general not substitutes for each other, and that diversification benefits of each asset class change substantially over time. Therefore, all three asset classes ought to be included in investors' portfolios. Furthermore, we show that the observed time variation in diversification benefits can be explained by time-varying return correlations. To see the implications of these findings for asset allocation in practice, we examine the out-of-sample performance of portfolio strategies, based on a variety of correlation structures. We find that the Dynamic Conditional Correlation (DCC) model (Engle, J Bus Econ Stat 20(3):339-350, 2002) outperforms other correlation structures, such as rolling-window, historical, and constant correlations. Our findings suggest that diversification benefits of the three asset classes should be examined in a dynamic setting, and that investors need to use appropriate correlation estimates to adjust for such time variation.

Original languageEnglish (US)
Pages (from-to)152-192
Number of pages41
JournalJournal of Real Estate Finance and Economics
Issue number1
StatePublished - Jan 2013

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Urban Studies


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