Modelling the Dependence Structure between Australian Equity and Real Estate Markets – a Conditional Copula Approach

We apply conditional copula models to investigate the dependence structure between returns of Australian equity markets and Real Estate Investment Trusts (REITS). The dependence between these assets has a significant impact on the diversification potential and risk for a portfolio of multiple assets and is therefore of great interest to portfolio managers and investors. We observe significant correlations and tail dependence between the considered series indicating a limited diversification potential of investments in REITS in Australia. Conducting a backtesting Value-at-Risk analysis, we also find that ignoring the complex dependence structure could lead to a significant underestimation of the actual risk.