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Downside Beta and Valuation-Based Property Returns

Author/s: Chyi Lin Lee

Date Published: 1/01/2009

Published in: Volume 15 - 2009 Issue 2 (pages 182 - 203)

Abstract

This study aims to examine the ability of downside beta in explaining the Australian direct property returns with addressing the smoothing issue. Utilising the quarterly IPD/PCA Australian property indices over 1995-2008, the results reveal that smoothed and unsmoothed downside betas are statistically distinguishable. The results also show that unsmoothed downside beta is positive and statistically significant related to Australian direct property returns, while smoothed downside beta exhibits a negative link with the returns, indicating that appraisal-smoothing has profound implications on the efficiency of downside beta. The results are robust after controlling for the different types of property and different smoothing parameters, confirming that a positive premium is required by direct property investors for compensating higher downside losses. These findings provide further insights into the pricing of valuation-based property indices.

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Keywords

Australia - Direct Property - Downside Beta - Smoothing

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