Hedging downside risk for REITs

• Published in: The North American journal of economics and finance Vol. 79; p. 102463
• Main Author: Zhou, Jian
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.07.2025
• Subjects: Downside risk; Hedge ratio; Hedging effectiveness; Out-of-sample analysis; REIT index futures; R30-General; Hedge ratio; Hedging effectiveness; Downside risk; REIT index futures; Out-of-sample analysis; G00-General
• ISSN: 1062-9408
• DOI: 10.1016/j.najef.2025.102463

•We consider a variety of downside risk measures and assess the hedging performance for REITs.•The benchmark minimum-variance approach leads to under-hedging compared with the minimum-downside-risk approaches.•A simpler historical simulation method generally outperforms the more complex Monte Carlo simulation method.•A decent amount of tail risk still remains after hedging whereas other types of down risk can be largely hedged away.•As the hedger becomes more concerned with tail risk, the hedging performance would deteriorate. As an alternative investment class, REITs possess a unique ‘duality’ feature and have been experiencing strong downside movements recently. The paper aims to investigate a timely research subject on hedging downside risk for REITs. We consider a variety of downside risk measures and assess the hedging performance of minimum-downside-risk (MDR) strategies relative to the benchmark minimum-variance (MV) approach. Our study reveals two important findings that are distinctive from those reported in other markets: first, the MV approach leads to under-hedging compared with various MDR approaches. Second, a simpler historical simulation method generally outperforms the more complex Monte Carlo simulation method in estimating optimal hedge ratios. Our study also yields similar results as in other markets. We find that a decent amount of tail risk would still remain even after hedging whereas other types of down risk can be largely hedged away. Moreover, as the hedger becomes more concerned with tail risk, the hedging performance would deteriorate.