European Journal of Business Science and Technology 2025, 11(1):39-66 | DOI: 10.11118/ejobsat.2025.002

The Role of REIT Dividend Policy on Ex-Ante Portfolio Allocation

Metin İlbasmış¹

¹ Aksaray University, Türkiye

To test the diversification benefits of REIT sub-groups formed based on dividend payout ratios, we forecast ex-ante variance-covariance matrices using a rolling window correlation and a DCC model. Regression-based mean-variance spanning tests, mean-variance efficient frontiers, and a minimum variance portfolio allocation approach using ex-ante optimization frameworks are considered. A major finding of the current study is the dividend payout ratios of REITs affect REIT market diversification benefits. Apart from extending stock market index investors’ investment universe and providing more efficient (higher profitability and/or lower risk) portfolios, REITs offer diversification benefits directly related to dividend policies. A unique level of diversification is attained by classifying REITs based on their dividend payout ratios. As well, these REIT sub-groups are capable of left-shifting the efficient frontier of a market portfolio with either of the REIT sub-groups.

Keywords: DCC, REITs, correlation, dividend policy, portfolio optimization, estimation, forecasting

JEL classification: G14, G18, G32, H12

Received: November 6, 2023; Revised: December 20, 2024; Accepted: January 3, 2025; Published: June 30, 2025  Show citation