Can Linear Predictability Models Time Bull and Bear
Real Estate Markets? Out-of-Sample Evidence
from REIT Portfolios
Daniele Bianchi ·Massimo Guidolin
Published online: 6 April 2013

Abstract

A recent literature has shown that REIT returns contain strong evidence of
bull and bear dynamic regimes that may be best captured using nonlinear econometric
models of the Markov switching type. In fact, REIT returns would display regime
shifts that are more abrupt and persistent than in the case of other asset classes. In
this paper we ask whether and how simple linear predictability models of the vector
autoregressive (VAR) type may be extended to capture the bull and bear patterns
typical of many asset classes, including REITs. We find that nonlinearities are so
deep that it is impossibile for a large family of VAR models to either produce similar
portfolio weights or to yield realized, ex-post out-of-sample long-horizon portfolio
performances that may compete with those typical of bull and bear models. A typical
investor with intermediate risk aversion and a 5-year horizon ought to be ready to
pay an annual fee of up to 5.7 % to have access to forecasts of REIT returns that