Dynamics of Private and Public Real Estate Markets

Using five assets (T-bills, bonds, stocks, and both public and private real estate), this study investigates how cointegration of capital markets affects the dynamics of public and private real estate markets. The results show that the price indices of the five assets are nonstationary and cointegrated. Some implications for the long-term equilibrium relationship for portfolio diversification, price discovery and prediction are discussed. In a Granger causality framework, error-correction augmented VAR models (VECM) and unrestricted VAR models are compared with respect to the conclusion regarding the interaction between public and private real estate returns. VECM is also shown to improve the prediction of private real estate returns relative to an unrestricted VAR model. These results raise questions about previous research studies regarding the dynamics between public and private real estate returns. It is shown that the long-term equilibrium relationship establishes a feedback between the two real estate markets, but the private market seems to informationally lead the public one. Possible explanations are also explored.     

Integration Between the Baltic and International Stock Markets

Using cointegration tests, this paper analyzes the existence of long-run relationships among Baltic stock markets and major international stock markets, including the United States, Japan, Germany, the United Kingdom, and France. Bivariate and multivariate cointegration tests indicate a common trend linking Latvia to European markets. Evidence indicates that the German market dominates this long-run relationship. In general, short-term Granger causality indicates causality running from the European markets to the Baltic markets, as well as among the Baltic states, excepting Latvian and Lithuanian short-term effects on the Estonian market. Overall, the results suggest that international investors can obtain diversification benefits given a long-term investment horizon because of the low degree of integration between the Baltic and international capital markets.     

The Causal Relationship Between Economic Policy Uncertainty and Stock Returns in China and India: Evidence from a Bootstrap Rolling Window Approach

This article applies a bootstrap rolling-window causality test to assess the causal relationship between economic policy uncertainty (EPU) and stock returns in China and India. Empirical literature examining causality between two time series may suffer from inaccurate results when the underlying full-sample time series have structural changes. However, the bootstrap rolling-window approach enables us to identify possible time-varying causalities between time series based on sub-sample data. Using a twenty-four-months rolling window over the period 1995:02 to 2013:02 in China and 2003:02–2013:02 in India, we do find that there are bidirectional causal relationships between EPU and stock returns in several sub-periods rather than in the whole sample period. However, the association between EPU and stock returns is, in general, weak for these two emerging countries. Our findings have important implications for policy makers and investors.     

Correlation and Volatility Dynamics in International Real Estate Securities Markets

We study international correlation and volatility dynamics of publicly traded real estate securities using monthly returns from 1984 and 2006. We also examine, for comparison, the correlations among the corresponding stock markets. A multivariate dynamic conditional correlation model captures the time-varying correlation within the full period. We confirm lower correlations between all real estate securities market returns than those between the stock market returns themselves. Some significant variations and structural changes in the correlation structure happened within the sample period. We detect a strong and positive connection between real estate securities market correlations and their conditional volatilities. We also find the international correlation structure of real estate securities and the broader stock market are linked to each other. Our results have economic motivations regarding the potential integration of international real estate securities markets and the possibility of including information on changing correlations and volatilities to design more optimal portfolios for international real estate securities.

A Real Estate Price Index for Thin Markets

This article examines a time-series-based method for estimating real estate price indexes for markets that have few transactions. The proposed method is more parsimonious than the conventional repeat sale or hedonic methods. Also, it is potentially more accurate and less prone to outliers. It achieves this by linking current transactions to preceding transactions, thereby increasing the set of comparable transactions on which to base the index. My experiments confirm that the time-series price index fares much better in thin markets than a benchmark hedonic index. It remains close to the true index when there are few transactions and it does not have the volatility of the benchmark index. While the time-series-based index developed in this article does better than the benchmark hedonic index, one surprise result is that the hedonic index is itself quite robust in small samples.     

Corporate Real Estate and Stock Market Performance

An interesting question in corporate real estate literature is whether real estate can improve the stock market performance of property-intensive non-real estate firms. Using a data set comprising 75 non-real estate corporations that own at least 20 percent properties, this paper empirically assesses and compares the pair-wise return, total risk, systematic risk and Jensen abnormal return performance of composite (with real estate) and hypothetical business (without real estate) firms. We employed Morgan Stanley Capital International world equity index instead of a local market index to provide some insights into the performance of the local market relative to the global market during the 1997–2001 volatile periods experienced by many Asian countries. Our results suggest the inclusion of real estate in a corporate portfolio appears to be associated with lower return, higher total risk, higher systematic risk and poorer abnormal return performance. It is therefore likely that non-real estate firms own properties for other reasons in addition to seeking improvement in their stock market performance. Further research is needed to explore the main factors contributing to corporate real estate ownership by non-real estate firms.     

An Exploratory Study on Nonlinear Causality Among the MILA Markets

According to conventional portfolio theory, an increase in the interconnectedness of international financial markets may reduce the potential for constructing diversified portfolios. This article explores the implications of the creation of the Latin American Integrated Market (MILA)¹ over the dependence structure of its members using correlation and cointegration analysis as well as linear and nonlinear Granger causality tests. The creation of MILA aimed to enhance the integration process that Latin American financial markets “naturally” present while still providing diversification opportunities to investors. The results of our empirical analysis suggest that such objective is being achieved. Evidence of a rise in cross-country linear correlations and their linear causal relationship supports the idea of an increasing financial integration process in the region, while the absence of cointegration and the weakening of the nonlinear causal relationship favors the creation of diversified regional portfolios. These findings provide valuable insights for investment portfolio designers, regulators, and supervisors.     

Empirical Analysis of Stock Returns and Volatility: Evidence from Seven Asian Stock Markets Based on TAR-GARCH Model

This paper investigates the time-series behavior of stock returns for seven Asian stock markets. In most cases, higher average returns appear to be associated with a higher level of volatility. Testing the relationship between stock returns and unexpected volatility, the evidence shows that four out of seven Asian stock markets have significant results. Further analyzing the relationship between stock returns and time-varying volatility by using Threshold Autoregressive GARCH(1,1)-in-mean specification indicates that the null hypothesis of no asymmetric effect on the conditional volatility is rejected for the daily data. However, the null cannot be rejected for the monthly data.     

Real Estate Markets and Macroprudential Policy in Europe

Boom‐bust cycles in real estate markets have been major factors in systemic financial crises and therefore need to be at the forefront of macroprudential policy. The geographically differentiated nature of real estate market fluctuations implies that these policies need to be granular across regions and countries. Before the financial crisis that started in 2007 property markets were overvalued in a range of European countries, but much like in other constituencies active policies addressing this were an exception. An increasing number of studies suggest that borrower‐based regulatory policies, such as reductions in loan‐to‐value or debt‐to‐income limits, can be effective in leaning against real estate booms. But many of the new macroprudential policy authorities in Europe do not have clear powers to determine them. Moreover, the cross‐border spillovers they may give rise to suggest the establishment of a well‐defined macroprudential coordination mechanism for the single European market.     

Long-Term Co-Memories and Short-Run Adjustment: Securitized Real Estate and Stock Markets

This study considers whether securitized real estate and stock markets have long-term co-memories and implications for short-term adjustment. Our results offer reasonable support for fractional cointegration (characteristic of a long memory process) between securitized real estate price, stock market price and key macroeconomic factors in some economies. The implication is that where fractional cointegration prevails, securitized real estate and common stocks are substitutable assets over the long run and these assets may not be held together in a portfolio for diversification purpose. Furthermore, short-run analysis indicates that the speed of adjustment towards the long-run equilibrium is faster for fractional integrated vector error correction model (FIVECM) than VECM as the former incorporates a long history of past cointegration residuals. Additional comparisons of the two models’ forecasting accuracy show that incorporating fractional cointegration in a VECM model improves the forecasting performance over conventional VECM models. Our results reinforce the notion that cointegration, fractional cointegration and short-run adjustment dynamics are important in understanding market integration/segmentation.