Evidence of segmentation in domestic and international property markets

The risk/return trade‐off is a perennial problem of portfolio managers. Portfolio diversification strategies should be such that investments are held in markets that are well‐insulated from each other so that the effects of market fluctuations in one market are not transferred to the other. Conventional wisdom suggests that a well‐diversified portfolio should contain assets spread across different markets, such as holdings of equities, bonds and property, while an increasingly accepted notion is that portfolios should also be diversified internationally. Research over the last few years has, if not questioned this conventional wisdom, at least sought confirmation. The current paper continues this inquiry. Looks, in particular, at the twin issues of whether property should form part of a well‐diversified domestic portfolio, and whether property should form part of a portfolio that is diversified internationally. Using the relatively new technique of cointegration analysis, provides evidence from the USA, the UK and Australia that domestic real estate and equity markets are segmented, and also provides evidence that securitized property markets are segmented internationally ‐ implying that there are risk‐reduction benefits to be gained through diversification in both instances.