The Conditional Distribution of Real Estate Returns: Relating time variation in higher moments to downside risk measurement

Previous research has shown that the returns on individual properties and listed property securities are skewed (Young and Gra¤ 1995 and Liu et al. 1992). This claim is investigated in the context of listed UK property companies. In particular, the shape of the conditional distribution of total monthly returns is examined for a group of 20 companies listed continuously since 1970. Also investigated is the claim of Young and Gra¤ that the skewness found in property returns varies over time. Using the model of Hansen (1994) it is found that while a large portion of property company returns in the UK do exhibit skewness in the conditional distribution only in a few instances is there evidence of time variation in the skewness parameter. When time varying skewness is found it is observed to be closely linked to the property cycle. The link between time varying skewness models and downside risk measures is also discussed and estimates of conditional downside risk are calculated for those few companies exhibiting the time varying skewness property. The implications of the ...ndings of this study for portfolio construction are also examined.