Risk estimation and appraisal-smoothing in UK property returns

For property investment returns which are calculated more frequently than annually (e.g. monthly, quarterly), determination of annual risk is required. The conventional formulae used to calculate risk do not take into account the appraisal-smoothing and temporal aggregation that is evident in many property returns series. This results in understated property risk estimates. This paper develops a formula to adjust for appraisal-smoothing and temporal aggregation in a monthly property series and obtains higher, but more appropriate volatility estimates. Using the IPD returns series over the 1987-1992 period, it is found that the appraisal-smoothed risk estimates need to be increased by a factor of approximately 3.5 to reflect the actual risk of UK property returns.

 

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ResourceID: 72416

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