Market heterogeneity, investment risk and portfolio allocation

Abstract

Purpose: With Paris' apartment market as a case study, this research addresses the heterogeneity of real estate assets with regard to investment and portfolio allocation. It demonstrates how the analysis per quantile may draw more suitable information about market risk and return. Design/methodology/approach: Quantile regression is used to handle the fact that willingness to pay for housing attributes may vary greatly over both space and asset value categories. The method is alternately applied on central and peripheral districts of Paris, or "arrondissements", with hedonic indices built for nine deciles over a 17-year period (1990-2006). Portfolio allocation is subsequently analysed through the analysis of risk and return metrics. Findings: The findings suggest that during the slump, peripheral districts show better resilience while also exhibiting a lower volatility. In addition, higher returns are observed for lower-priced apartments, both central and peripheral. During the recovery and boom stages of the cycle, the highest returns are experienced for the cheapest apartments in central locations, whereas upper-priced, centrally located units yield the lowest returns.