Do investments in international securitized real estate markets make a statistically significant contribution to an internationally diversified mixed-asset portfolio, and does currency risk exposure have an impact on the results? These questions have become more and more popular for both private and institutional investors as well as researchers in the last years and are therefore guideline and motivation for our analysis. For the empirical analysis, we use monthly data on bond, stock, and real estate market index returns from nine countries around the world for the period from 1986 to 2009, which can be considered representative. To our knowledge, this is the first study applying spanning tests for such a broad range of markets and assets while simultaneously considering currency risk exposure, which we see as an important contribution of our paper to the existing literature. Applying regression-based and stochastic discount factor-based spanning tests suggested by Huberman and Kandel (1987) and De Roon et al. (2001) allows us to measure diversification benefits by their statistical significance and to statistically check whether a shift of the meanvariance frontier is too large to be attributed to chance. Our main findings are as follows. First, for a US investor invested in a diversified US mixedasset portfolio, international bonds and stocks provide only slightly significant diversification benefits when currency risk is not hedged. Second, adding international securitized real estate to an internationally diversified bond and stock portfolio provides significant diversification benefits. Third, taking into account currency risk further strengthens the results. In this setting, even the shift of the tangency portfolio becomes highly significant for international bonds, but again, this does not apply to international stocks. In the case of real estate, all conducted tests strongly reject the hypothesis of spanning for the efficient frontier and of intersection for both the minimum variance portfolio and the tangency portfolio - even if the benchmark of US real estate, international bonds, and international stocks is challenging and quite restrictive. The results from out-of-sample analysis and a setting with short selling constraints mainly confirm the findings. Summarizing, it is shown that neglecting international real estate in an international mixedasset portfolio results in a loss of investors’ diversification opportunities and that a fully currency-hedged strategy yields significant diversification benefits relative to unhedged currency risk exposure.


Diversification Benefits; International Mixed-Asset Portfolios; Currency Hedging; Spanning Tests; Short Selling Constraints