Tail risk diversification strategy with flight-from-loss approach: Evidence from U.S. REITs

DOI: https://doi.org/10.3846/ijspm.2025.24611

Abstract

This study introduces a novel portfolio allocation strategy, the flight-from-loss approach, designed to diversify tail risk in the REIT market. The strategy reallocates capital toward assets that have historically outperformed during periods of extreme REIT losses, aiming to reduce downside risk and improve portfolio efficiency. Using U.S. REIT data from 1993 to 2023, we demonstrate that our portfolio approach reduces tail risk significantly, while also enhancing Sharpe ratios compared to a REIT-only benchmark portfolio. These diversification benefits are particularly significant during market crises, such as the subprime mortgage crisis, when risk reduction exceeds 30%. Our analysis further reveals that the minimum-variance and tangency portfolio approaches consistently outperform the equal-weight method in both risk control and performance efficiency. To test the strategy’s generalizability, we applied it to the Fama-French 30 industry portfolios, where the results of some industries indicate even stronger risk reduction and Sharpe ratio gains than in the REIT market. These findings suggest that the flight-from-loss strategy offers a practical, cross-sector solution for managing concentrated portfolio risks.

Keywords:

diversification, tail risk, portfolio allocation, Real Estate Investment Trusts (REITs), risk management

How to Cite

Koo, K. M., & Song, J. (2025). Tail risk diversification strategy with flight-from-loss approach: Evidence from U.S. REITs. International Journal of Strategic Property Management, 29(4), 266–286. https://doi.org/10.3846/ijspm.2025.24611

Share

Published in Issue
September 8, 2025
Abstract Views
15

References

Almeida, C., Ardison, K., Freire, G., Garcia, R., & Orłowski, P. (2024). High-frequency tail risk premium and stock return predictability. Journal of Financial and Quantitative Analysis, 59(8), 3633–3670. https://doi.org/10.1017/S0022109023001199

Ang, A., & Bekaert, G. (2002). International asset allocation with regime shifts. The Review of Financial Studies, 15(4), 1137–1187. https://doi.org/10.1093/rfs/15.4.1137

Ang, A., & Chen, J. (2002). Asymmetric correlations of equity portfolios. Journal of Financial Economics, 63(3), 443–494. https://doi.org/10.1016/S0304-405X(02)00068-5

Ang, A., Chen, J., & Xing, Y. (2006). Downside risk. The Review of Financial Studies, 19(4), 1191–1239. https://doi.org/10.1093/rfs/hhj035

Bekaert, G., & Urias, M. S. (1996). Diversification, integration and emerging market closed‐end funds. The Journal of Finance, 51(3), 835–869. https://doi.org/10.1111/j.1540-6261.1996.tb02709.x

Boyson, N. M., Stahel, C. W., & Stulz, R. M. (2010). Hedge fund contagion and liquidity shocks. The Journal of Finance, 65(5), 1789–1816. https://doi.org/10.1111/j.1540-6261.2010.01594.x

Brunnermeier, M. K., & Pedersen, L. H. (2009). Market liquidity and funding liquidity. The Review of Financial Studies, 22(6), 2201–2238. https://doi.org/10.1093/rfs/hhn098

Caballero, R. J., & Krishnamurthy, A. (2008). Collective risk management in a flight to quality episode. The Journal of Finance, 63(5), 2195–2230. https://doi.org/10.1111/j.1540-6261.2008.01394.x

Campbell, R., Huisman, R., & Koedijk, K. (2001). Optimal portfolio selection in a Value-at-Risk framework. Journal of Banking & Finance, 25(9), 1789–1804. https://doi.org/10.1016/S0378-4266(00)00160-6

Capozza, D. R., & Seguin, P. J. (2003). Inside ownership, risk sharing and Tobin’s Q‐ratios: Evidence from REITs. Real Estate Economics, 31(3), 367–404. https://doi.org/10.1111/1540-6229.00070

Chen, X., & Mo, D. (2025). Revaluating safe havens: The effectiveness of traditional assets during extreme crises? SSRN Electronic Journal. https://doi.org/10.2139/ssrn.5220055

Chiang, M. C., Sing, T. F., & Tsai, I. C. (2017). Spillover risks in REITs and other asset markets. The Journal of Real Estate Finance and Economics, 54(4), 579–604. https://doi.org/10.1007/s11146-015-9545-9

Christoffersen, P., Errunza, V., Jacobs, K., & Langlois, H. (2012). Is the potential for international diversification disappearing? A dynamic copula approach. The Review of Financial Studies, 25(12), 3711–3751. https://doi.org/10.1093/rfs/hhs104

DeMiguel, V., Garlappi, L., & Uppal, R. (2009). Optimal versus naive diversification: How inefficient is the 1/N portfolio strategy? The Review of Financial Studies, 22(5), 1915–1953. https://doi.org/10.1093/rfs/hhm075

Elkamhi, R., & Stefanova, D. (2015). Dynamic hedging and extreme asset co-movements. The Review of Financial Studies, 28(3), 743–790. https://doi.org/10.1093/rfs/hhu074

Fama, E. F., & French, K. R. (1997). Industry costs of equity. Journal of Financial Economics, 43(2), 153–193. https://doi.org/10.1016/S0304-405X(96)00896-3

Feng, Z., Price, S. M., & Sirmans, C. (2011). An overview of equity real estate investment trusts (REITs): 1993–2009. Journal of Real Estate Literature, 19(2), 307–343. https://doi.org/10.1080/10835547.2011.12090304

Ferriani, F., Gazzani, A., & Natoli, F. (2024). Flight to climatic safety: Local natural disasters and global portfolio flows (Working Paper). Bank of Italy. https://doi.org/10.2139/ssrn.4849158

Ferson, W. E., & Harvey, C. R. (1993). The risk and predictability of international equity returns. The Review of Financial Studies, 6(3), 527–566. https://doi.org/10.1093/rfs/6.3.527

Gabaix, X., Gopikrishnan, P., Plerou, V., & Stanley, H. E. (2006). Institutional investors and stock market volatility. The Quarterly Journal of Economics, 121(2), 461–504. https://doi.org/10.1162/qjec.2006.121.2.461

Gava, J., Guevara, F., & Turc, J. (2021). Turning tail risks into tailwinds. Journal of Portfolio Management, 47(4), 41–70. https://doi.org/10.3905/jpm.2021.1.205

Green, R. C., & Hollifield, B. (1992). When will mean‐variance efficient portfolios be well diversified? The Journal of Finance, 47(5), 1785–1809. https://doi.org/10.1111/j.1540-6261.1992.tb04683.x

Guo, Y., Li, P., & Li, A. (2021). Tail risk contagion between international financial markets during COVID-19 pandemic. International Review of Financial Analysis, 73, Article 101649. https://doi.org/10.1016/j.irfa.2020.101649

Hardin, W. G., Highfield, M. J., Hill, M. D., & Kelly, G. W. (2009). The determinants of REIT cash holdings. The Journal of Real Estate Finance and Economics, 39(1), 39–57. https://doi.org/10.1007/s11146-007-9103-1

He, Z., & Zhang, S. (2024). Risk contagion and diversification among sovereign CDS, stock, foreign exchange and commodity markets: Fresh evidence from G7 and BRICS countries. Finance Research Letters, 62, Article 105267. https://doi.org/10.1016/j.frl.2024.105267

Hoesli, M., & Reka, K. (2013). Volatility spillovers, comovements and contagion in securitized real estate markets. The Journal of Real Estate Finance and Economics, 47(1), 1–35. https://doi.org/10.1007/s11146-011-9346-8

Jagannathan, R., & Ma, T. (2003). Risk reduction in large portfolios: Why imposing the wrong constraints helps. The Journal of Finance, 58(4), 1651–1683. https://doi.org/10.1111/1540-6261.00580

Kawaguchi, Y., Sa‐Aadu, J., & Shilling, J. D. (2017). REIT stock price volatility and the effects of leverage. Real Estate Economics, 45(2), 452–477. https://doi.org/10.1111/1540-6229.12153

Kelly, B., & Jiang, H. (2014). Tail risk and asset prices. The Review of Financial Studies, 27(10), 2841–2871. https://doi.org/10.1093/rfs/hhu039

Lewellen, J., & Nagel, S. (2006). The conditional CAPM does not explain asset-pricing anomalies. Journal of Financial Economics, 82(2), 289–314. https://doi.org/10.1016/j.jfineco.2005.05.012

Li, Z. Z., Su, C. W., & Tao, R. (2024). No longer a safe haven currency? A fresh evidence of Japanese yen under uncertainty. Panoeconomicus, 71(1), 119–134. https://doi.org/10.2298/PAN190329021L

Liow, K. H., Ho, K. H. D., Ibrahim, M. F., & Chen, Z. (2009). Correlation and volatility dynamics in international real estate securities markets. The Journal of Real Estate Finance and Economics, 39(2), 202–223. https://doi.org/10.1007/s11146-008-9108-4

Liu, E. X. (2016). Portfolio diversification and international corporate bonds. Journal of Financial and Quantitative Analysis, 51(3), 959–983. https://doi.org/10.1017/S002210901600034X

Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x

Merton, R. C. (1987). A simple model of capital market equilibrium with incomplete information. The Journal of Finance, 42(3), 483–510. https://doi.org/10.1111/j.1540-6261.1987.tb04565.x

Odusami, B. O. (2021). Forecasting the value-at-risk of REITs using realized volatility jump models. The North American Journal of Economics and Finance, 58, Article 101426. https://doi.org/10.1016/j.najef.2021.101426

Sanford, A. (2022). Optimized portfolio using a forward-looking expected tail loss. Finance Research Letters, 46, Article 102421.

Song, J., & Liow, K. H. (2023). Industrial tail exposure risk and asset price: Evidence from US REITs. Real Estate Economics, 51(5), 1209–1245. https://doi.org/10.1111/1540-6229.12402

Sun, L., Titman, S. D., & Twite, G. J. (2015). REIT and commercial real estate returns: A postmortem of the financial crisis. Real Estate Economics, 43(1), 8–36. https://doi.org/10.1111/1540-6229.12055

Xu, Y., & Malkiel, B. G. (2003). Investigating the behavior of idiosyncratic volatility. The Journal of Business, 76(4), 613–645. https://doi.org/10.1086/377033

Zhou, J. (2012). Multiscale analysis of international linkages of REIT returns and volatilities. The Journal of Real Estate Finance and Economics, 45(4), 1062–1087. https://doi.org/10.1007/s11146-011-9302-7

View article in other formats

CrossMark check

CrossMark logo

Published

2025-09-08

Issue

Section

Articles

How to Cite

Koo, K. M., & Song, J. (2025). Tail risk diversification strategy with flight-from-loss approach: Evidence from U.S. REITs. International Journal of Strategic Property Management, 29(4), 266–286. https://doi.org/10.3846/ijspm.2025.24611

Share