A new time-dependent trading strategy for securitized real estate and equity indices
DOI: https://doi.org/10.3846/1648715X.2016.1260072Abstract
The “buy-and-hold” strategy based on the EMH has been adopted by many investors for long. However, the global financial crisis in 2008 caused more doubt to be cast on EMH. Therefore, many scholars have attempted to create a trading strategy which can outperform the “buy-and-hold” strategy. In this study, we use the Shiryaev-Zhou index to derive a new generalized time-dependent strategy of which the moving-window size can be changed to see how the moving-window size affects the resulting profit of our strategy. We test our strategy on the securitized real estate and general equity indices of six economies, and find the optimal moving-window size for our strategy on each stock index. The results show that when the optimal moving-window size is used, our strategy outperforms the “buy-and-hold” strategy for most cases. Furthermore, during stock market downturns, it’s advisable to adopt our strategy, preferably with larger moving-window sizes, to prevent losses when the stock prices fall rapidly. However, during long periods of booms, it’s better to adhere to the “buy-and-hold” strategy. This implies that we should switch strategies when market fundamentals changes significantly. Property practitioners can also apply this strategy for a better portfolio management to increase their profit.
First published online 29 September 2017
Keywords:
Shiryaev-Zhou index, “Buy-and-hold”, moving-window size, transaction cost, securitized real estate indexHow to Cite
Hui, E. C., & Chan, K. K. K. (2018). A new time-dependent trading strategy for securitized real estate and equity indices. International Journal of Strategic Property Management, 22(1), 64-79. https://doi.org/10.3846/1648715X.2016.1260072
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Copyright (c) 2018 The Author(s). Published by Vilnius Gediminas Technical University.
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Gallo, J. G.; Lockwood, L. J.; Zhang, Y. 2013. Structuring global property portfolios: a cointegration approach, Journal of Real Estate Research 35(1): 53-82.
Hui, E. C. M.; Chan, K. K. K. 2012. Are global real estate markets contagious?, International Journal of Strategic Property Management 16(3): 219-235. <a href= "https://doi.org/10.3846/1648715X.2011.645904" target="_blank" rel="noopener"> https://doi.org/10.3846/1648715X.2011.645904</a>
Hui, E. C. M.; Chan, K. K. K. 2013. The European sovereign debt crisis: contagion across European real estate markets, Journal of Property Research 30(2): 87-102. <a href= "https://doi.org/10.1080/09599916.2012.724441" target="_blank" rel="noopener"> https://doi.org/10.1080/09599916.2012.724441</a>
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Hui, E. C. M.; Chen, J. 2012. Investigating the change of causality in emerging property markets during the financial tsunami, Physica A: Statistical Mechanics and its Applications 391(15): 3951-3962. <a href= "https://doi.org/10.1016/j.physa.2012.03.007" target="_blank" rel="noopener"> https://doi.org/10.1016/j.physa.2012.03.007</a>
Hui, E. C. M.; Yam, S. C. P. 2014. Can we beat the “buy-and-hold” strategy? Analysis on European and American secu-ritized real estate indices, International Journal of Strategic Property Management 18(1): 28-37. <a href= "https://doi.org/10.3846/1648715X.2013.862190" target="_blank" rel="noopener"> https://doi.org/10.3846/1648715X.2013.862190</a>
Hui, E. C. M.; Yam, S. C. P.; Chen, S. W. 2012. Shiryaev-Zhou index – a noble approach to benchmarking and analysis of real estate stocks, International Journal of Strategic Property Management 16(2): 158-172. <a href= "https://doi.org/10.3846/1648715X.2011.638946" target="_blank" rel="noopener"> https://doi.org/10.3846/1648715X.2011.638946</a>
Hui, E. C. M.; Yam, S. C. P.; Wright, J.; Chan, K. K. K. 2014. Shall we buy and hold? Evidence from Asian real estate markets, Journal of Property Investment and Finance 32(2): 168-186. <a href= "https://doi.org/10.1108/JPIF-09–2013–0059" target="_blank" rel="noopener"> https://doi.org/10.1108/JPIF-09–2013–0059</a>
Hui, E. C. M.; Zheng, X. 2012. The dynamic correlation and volatility of real estate price and rental: an application of MSV model, Applied Economics 44(23): 2985-2995. <a href= "https://doi.org/10.1080/00036846.2011.568409" target="_blank" rel="noopener"> https://doi.org/10.1080/00036846.2011.568409</a>
Krystalogianni, A.; Tsolacos, S. 2004. Regime switching in yield structures and real estate investment, Journal of Property Research 21(4): 279-299. <a href= "https://doi.org/10.1080/09599910500182108" target="_blank" rel="noopener"> https://doi.org/10.1080/09599910500182108</a>
Lempérière, Y.; Deremble, C.; Seager, P.; Potters, M.; Bouchaud, J. P. 2014. Two centuries of trend following, Journal of Investment Strategies 3(3): 41-61. <a href= "https://doi.org/10.21314/JOIS.2014.043" target="_blank" rel="noopener"> https://doi.org/10.21314/JOIS.2014.043</a>
Malkiel, B. G. 2003. The efficient market hypothesis and its critics, Journal of Economic Perspectives 17(1): 59-82. <a href= "https://doi.org/10.1257/089533003321164958" target="_blank" rel="noopener"> https://doi.org/10.1257/089533003321164958</a>
Malkiel, B. G. 2005. Reflections on the efficient market hypothesis: 30 years later, Financial Review 40(1): 1-9. <a href= "https://doi.org/10.1111/j.0732–8516.2005.00090.x" target="_blank" rel="noopener"> https://doi.org/10.1111/j.0732–8516.2005.00090.x</a>
Malkiel, B. G.; Fama, E. F. 1970. Efficient capital markets: a review of theory and empirical work, Journal of Finance 25(2): 383-417. <a href= "https://doi.org/10.1111/j.1540–6261.1970.tb00518.x" target="_blank" rel="noopener"> https://doi.org/10.1111/j.1540–6261.1970.tb00518.x</a>
Markowitz, H. M. 1952. Portfolio selection, Journal of Finance 7(1): 77-91. <a href= "https://doi.org/10.1111/j.1540–6261.1952.tb01525.x" target="_blank" rel="noopener"> https://doi.org/10.1111/j.1540–6261.1952.tb01525.x</a>
Merton, R. C. 1971. Optimum consumption and portfolio rules in a continuous-time model, Journal of Economic Theory 3: 373-413. <a href= "https://doi.org/10.1016/0022–0531(71)90038-X" target="_blank" rel="noopener"> https://doi.org/10.1016/0022–0531(71)90038-X</a>
Richardson, H. R. 1989. A minimum variance result in continuous trading portfolio optimization, Management Science 35: 1045-1055. <a href= "https://doi.org/10.1287/mnsc.35.9.1045" target="_blank" rel="noopener"> https://doi.org/10.1287/mnsc.35.9.1045</a>
Samuelson, P. A. 1969. Lifetime portfolio selection by dynamic stochastic programming, Review of Economics and Statistics 51: 239-246. <a href= "https://doi.org/10.2307/1926559" target="_blank" rel="noopener"> https://doi.org/10.2307/1926559</a>
Shiryaev, A. N.; Xu, Z. Q.; Zhou, X. Y. 2008. Thou shalt buy and hold, Quantitative Finance 8(8): 765-776. <a href= "https://doi.org/10.1080/14697680802563732" target="_blank" rel="noopener"> https://doi.org/10.1080/14697680802563732</a>
Wong, W. K.; Wright, J. A.; Yam, S. C. P.; Yung, S. P. 2012. A mixed Sharpe ratio, Risk and Decision Analysis 3: 37-65.Yam, S. C. P.; Yung, S. P.; Zhou, W. 2009. Two rationales behind the “buy-and-hold or sell-at-once” strategy, Journal of Applied Probability 46: 651-668. <a href= "https://doi.org/10.1017/S0021900200005805" target="_blank" rel="noopener"> https://doi.org/10.1017/S0021900200005805</a>
Yam, S. C. P.; Yung, S. P.; Zhou, W. 2012a. A unified `bang-bang’ principle with respect to R-invariant performance bench-marks, Theory of Probability and Its Applications 57(2): 405-414. <a href= "https://doi.org/10.4213/tvp4457" target="_blank" rel="noopener"> https://doi.org/10.4213/tvp4457</a>
Yam, S. C. P.; Yung, S. P.; Zhou, W. 2012b. Optimal selling time in stock market over a finite time horizon, Acta Mathematicae Applicatae Sinica 28(3): 557-570. <a href= "https://doi.org/10.1007/s10255–012–0169-z" target="_blank" rel="noopener"> https://doi.org/10.1007/s10255–012–0169-z</a>
Cheng, P.; Lin, Z.; Liu, Y. 2010. Illiquidity, transaction cost, and optimal holding period for real estate: theory and application, Journal of Housing Economics 19(2): 109-118. <a href= "https://doi.org/10.1016/j.jhe.2010.03.002" target="_blank" rel="noopener"> https://doi.org/10.1016/j.jhe.2010.03.002</a>
Dai, M.; Jin, H.; Zhong, Y.; Zhou, X. Y. 2008. Buy on the lows and sell on the highs, Working paper, University of Oxford.
Du Toit, J.; Peskir, G. 2008. Selling a stock at the ultimate maximum, Annals of Applied Probability 19: 983-1014. <a href= "https://doi.org/10.1214/08-AAP566" target="_blank" rel="noopener"> https://doi.org/10.1214/08-AAP566</a>
Gallo, J. G.; Lockwood, L. J.; Zhang, Y. 2013. Structuring global property portfolios: a cointegration approach, Journal of Real Estate Research 35(1): 53-82.
Hui, E. C. M.; Chan, K. K. K. 2012. Are global real estate markets contagious?, International Journal of Strategic Property Management 16(3): 219-235. <a href= "https://doi.org/10.3846/1648715X.2011.645904" target="_blank" rel="noopener"> https://doi.org/10.3846/1648715X.2011.645904</a>
Hui, E. C. M.; Chan, K. K. K. 2013. The European sovereign debt crisis: contagion across European real estate markets, Journal of Property Research 30(2): 87-102. <a href= "https://doi.org/10.1080/09599916.2012.724441" target="_blank" rel="noopener"> https://doi.org/10.1080/09599916.2012.724441</a>
Hui, E. C. M.; Chan, K. K. K. 2014a. Can we still beat “buy-and-hold” for individual stocks?, Physica A: Statistical Mechanics and its Applications 410: 513-534. <a href= "https://doi.org/10.1016/j.physa.2014.05.061" target="_blank" rel="noopener"> https://doi.org/10.1016/j.physa.2014.05.061</a>
Hui, E. C. M.; Chan, K. K. K. 2014b. The global financial crisis: is there any contagion between real estate and equity markets?, Physica A: Statistical Mechanics and its Applications 405: 216-225. <a href= "https://doi.org/10.1016/j.physa.2014.03.008" target="_blank" rel="noopener"> https://doi.org/10.1016/j.physa.2014.03.008</a>
Hui, E. C. M.; Chen, J. 2012. Investigating the change of causality in emerging property markets during the financial tsunami, Physica A: Statistical Mechanics and its Applications 391(15): 3951-3962. <a href= "https://doi.org/10.1016/j.physa.2012.03.007" target="_blank" rel="noopener"> https://doi.org/10.1016/j.physa.2012.03.007</a>
Hui, E. C. M.; Yam, S. C. P. 2014. Can we beat the “buy-and-hold” strategy? Analysis on European and American secu-ritized real estate indices, International Journal of Strategic Property Management 18(1): 28-37. <a href= "https://doi.org/10.3846/1648715X.2013.862190" target="_blank" rel="noopener"> https://doi.org/10.3846/1648715X.2013.862190</a>
Hui, E. C. M.; Yam, S. C. P.; Chen, S. W. 2012. Shiryaev-Zhou index – a noble approach to benchmarking and analysis of real estate stocks, International Journal of Strategic Property Management 16(2): 158-172. <a href= "https://doi.org/10.3846/1648715X.2011.638946" target="_blank" rel="noopener"> https://doi.org/10.3846/1648715X.2011.638946</a>
Hui, E. C. M.; Yam, S. C. P.; Wright, J.; Chan, K. K. K. 2014. Shall we buy and hold? Evidence from Asian real estate markets, Journal of Property Investment and Finance 32(2): 168-186. <a href= "https://doi.org/10.1108/JPIF-09–2013–0059" target="_blank" rel="noopener"> https://doi.org/10.1108/JPIF-09–2013–0059</a>
Hui, E. C. M.; Zheng, X. 2012. The dynamic correlation and volatility of real estate price and rental: an application of MSV model, Applied Economics 44(23): 2985-2995. <a href= "https://doi.org/10.1080/00036846.2011.568409" target="_blank" rel="noopener"> https://doi.org/10.1080/00036846.2011.568409</a>
Krystalogianni, A.; Tsolacos, S. 2004. Regime switching in yield structures and real estate investment, Journal of Property Research 21(4): 279-299. <a href= "https://doi.org/10.1080/09599910500182108" target="_blank" rel="noopener"> https://doi.org/10.1080/09599910500182108</a>
Lempérière, Y.; Deremble, C.; Seager, P.; Potters, M.; Bouchaud, J. P. 2014. Two centuries of trend following, Journal of Investment Strategies 3(3): 41-61. <a href= "https://doi.org/10.21314/JOIS.2014.043" target="_blank" rel="noopener"> https://doi.org/10.21314/JOIS.2014.043</a>
Malkiel, B. G. 2003. The efficient market hypothesis and its critics, Journal of Economic Perspectives 17(1): 59-82. <a href= "https://doi.org/10.1257/089533003321164958" target="_blank" rel="noopener"> https://doi.org/10.1257/089533003321164958</a>
Malkiel, B. G. 2005. Reflections on the efficient market hypothesis: 30 years later, Financial Review 40(1): 1-9. <a href= "https://doi.org/10.1111/j.0732–8516.2005.00090.x" target="_blank" rel="noopener"> https://doi.org/10.1111/j.0732–8516.2005.00090.x</a>
Malkiel, B. G.; Fama, E. F. 1970. Efficient capital markets: a review of theory and empirical work, Journal of Finance 25(2): 383-417. <a href= "https://doi.org/10.1111/j.1540–6261.1970.tb00518.x" target="_blank" rel="noopener"> https://doi.org/10.1111/j.1540–6261.1970.tb00518.x</a>
Markowitz, H. M. 1952. Portfolio selection, Journal of Finance 7(1): 77-91. <a href= "https://doi.org/10.1111/j.1540–6261.1952.tb01525.x" target="_blank" rel="noopener"> https://doi.org/10.1111/j.1540–6261.1952.tb01525.x</a>
Merton, R. C. 1971. Optimum consumption and portfolio rules in a continuous-time model, Journal of Economic Theory 3: 373-413. <a href= "https://doi.org/10.1016/0022–0531(71)90038-X" target="_blank" rel="noopener"> https://doi.org/10.1016/0022–0531(71)90038-X</a>
Richardson, H. R. 1989. A minimum variance result in continuous trading portfolio optimization, Management Science 35: 1045-1055. <a href= "https://doi.org/10.1287/mnsc.35.9.1045" target="_blank" rel="noopener"> https://doi.org/10.1287/mnsc.35.9.1045</a>
Samuelson, P. A. 1969. Lifetime portfolio selection by dynamic stochastic programming, Review of Economics and Statistics 51: 239-246. <a href= "https://doi.org/10.2307/1926559" target="_blank" rel="noopener"> https://doi.org/10.2307/1926559</a>
Shiryaev, A. N.; Xu, Z. Q.; Zhou, X. Y. 2008. Thou shalt buy and hold, Quantitative Finance 8(8): 765-776. <a href= "https://doi.org/10.1080/14697680802563732" target="_blank" rel="noopener"> https://doi.org/10.1080/14697680802563732</a>
Wong, W. K.; Wright, J. A.; Yam, S. C. P.; Yung, S. P. 2012. A mixed Sharpe ratio, Risk and Decision Analysis 3: 37-65.Yam, S. C. P.; Yung, S. P.; Zhou, W. 2009. Two rationales behind the “buy-and-hold or sell-at-once” strategy, Journal of Applied Probability 46: 651-668. <a href= "https://doi.org/10.1017/S0021900200005805" target="_blank" rel="noopener"> https://doi.org/10.1017/S0021900200005805</a>
Yam, S. C. P.; Yung, S. P.; Zhou, W. 2012a. A unified `bang-bang’ principle with respect to R-invariant performance bench-marks, Theory of Probability and Its Applications 57(2): 405-414. <a href= "https://doi.org/10.4213/tvp4457" target="_blank" rel="noopener"> https://doi.org/10.4213/tvp4457</a>
Yam, S. C. P.; Yung, S. P.; Zhou, W. 2012b. Optimal selling time in stock market over a finite time horizon, Acta Mathematicae Applicatae Sinica 28(3): 557-570. <a href= "https://doi.org/10.1007/s10255–012–0169-z" target="_blank" rel="noopener"> https://doi.org/10.1007/s10255–012–0169-z</a>
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Copyright (c) 2018 The Author(s). Published by Vilnius Gediminas Technical University.
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This work is licensed under a Creative Commons Attribution 4.0 International License.
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Hui, E. C., & Chan, K. K. K. (2018). A new time-dependent trading strategy for securitized real estate and equity indices. International Journal of Strategic Property Management, 22(1), 64-79. https://doi.org/10.3846/1648715X.2016.1260072