Is There Volatility Convergence in Asia-Pacific Securitized Real Estate Markets?

We assess whether a group of eight Asia-Pacific securitized real estate markets display similar volatility trend over the past 15 years, 1995–2009, using an econometric model that incorporates common volatility effects across the sample markets. The empirical results indicate the presence of at least one common variance component, and thus partial volatility convergence, among the sample Asia real estate securities markets. During the global financial crisis period, some real estate securities markets are co-integrated in both their first and second moments and demonstrate partial price and volatility convergence. Our analysis that focuses in capturing the common roots in the second moment whilst accounting for time-varying variance has important implications for international real estate portfolio investment.     

Volatility Spillovers, Comovements and Contagion in Securitized Real Estate Markets

This paper analyzes the relationships between local and global securitized real estate markets, but also between securitized real estate and common stock markets. First, the volatility transmissions across markets are examined using an asymmetric t-BEKK (Baba-Engle-Kraft-Kroner) specification of their covariance matrix. Second, correlations from that model and tail dependences estimated using a time-varying copula framework are analyzed to assess whether different dynamics underlie the comovements in the whole distribution and those in the tails. Third, we investigate market contagion by testing for structural changes in the tail dependences. We use data for the U.S., the U.K. and Australia for the period 1990–2010 as a basis for our analyses. Spillover effects are found to be the largest in the U.S., both domestically and internationally. Further, comovements in tail distributions between markets appear to be quite important. We also document different dynamics between the conditional tail dependences and correlations. Finally, we find evidence of market contagion between the U.S. and the U.K. markets following the subprime crisis.     

Price Discovery in Real Estate Markets: A Dynamic Analysis

Although the correlation between the public and private market pricing of real estate has generated considerable research effort, the methods utilized in previous studies have failed to capture the dynamic nature of this correlation. This paper proposes a new statistical method to address this issue. This method, known as the dynamic conditional correlation GARCH model, enables us to study the dynamics of the correlation between the two markets over time and enrich our understanding of the public and private market pricing of real assets. We find that the correlation between NAV returns and REIT returns is dynamic for all REIT types and there is a strong degree of persistence in the series of correlation. Our Granger-causality tests show that price discovery generally takes place in the securitized public market. However, we also find significant variations across property types and individual firms within each type. Our results indicate that constructing an optimal portfolio requires firm level analysis of causality and correlation between REIT returns and NAV returns.     

Long-term Memory in Volatility: Some Evidence from International Securitized Real Estate Markets

While the long memory property is examined in the literature for the US REIT returns, this paper extends the analysis to international securitized real estate markets with the hope of finding answers or confirming prior stock market evidence regarding the presence (or absence) of long memory volatilities for 40 weekly real estate indices (original and hedged). Using a battery of five econometric tests on three alternative risk measures; weekly observed absolute and squared mean deviations and conditional variances, we find statistically significant evidence of long memory in the volatility structure of most securitized real estate markets studied. Volatility persistence is particularly strong in Asia, but is not consistent throughout the period of study.     

Common factors in international securitized real estate markets

This study investigates the presence of common factors in the securitized real estate markets of the Untied States (US), United Kingdom (UK), Hong Kong (HK), and Singapore (SG). Using a combination of factor analysis and canonical correlation analysis on 10-year monthly return data for 142 real estate securities in the four markets, more common risk factors among real estate securities within a country than across countries are detected. In addition, there is at least one common securitized real estate market factor that is moderately correlated with the world real estate market, and to a lesser extent, with the world stock market. However, the degree of linkage across the four securitized real estate markets is much weaker than the strong linkages present across the four economies. It further appears that the extent to which correlations are found in international securitized real estate markets might largely be due to the increasing integrated nature of the world real economy, rather than a result of the globalization of financial markets. The results are preliminary, but indicative, and suggest that more studies exploring how common factors, together with the local market portfolio, could help explain the return-generating process of securitized real estate.     

Foreign Property Shocks and the Impact on Domestic Securitized Real Estate Markets: An Unobserved Components Approach

As the globalization of world financial markets continues unabated the issue of benefits arising from international diversification becomes increasingly important. Due to the fixed geographical nature of the underlying product, securitized property might be considered immune from the effects of globalization, and to this extent researchers have considered the issue of international property market interdependence using a variety of statistical procedures. In this paper the question of interdependence across securitized property markets is examined by combining the Inoue (1999) cointegration methodology with the structural time series procedure of Harvey (1989). In the event of commonality of movement across property markets, this approach permits the researcher to isolate and visualize common movement, an operation that may be helpful to a portfolio manager trying to understand cross market activity. The results indicate that there is some unifying force across international property markets and that this unifying force may stem from the United States. The results also suggest that, at least to some extent, shocks to securitized property markets produce a similar response to stock market shocks.     

Volatility Decomposition and Correlation in International Securitized Real Estate Markets

This study contributes to the literature in international securitized real estate market volatility in three ways. Each market’s conditional volatility is decomposed into a “permanent” or long-run component and a “transitory” or short-run component via a component-GARCH model. Even though with the same number of common factors derived from the “permanent” and “transitory” volatility series, their loadings are not similar and consequently the long-run and short-run volatility linkages for some markets are different. Finally there are significant volatility co-movements between real estate and stock markets’ “permanent” and “transitory” components suggesting that real estate markets are at least not segmented from stock markets in international investing.     

U.S. Monetary Policy Surprises and International Securitized Real Estate Markets

This paper examines the impact of U.S. monetary policy surprises on securitized real estate markets in 18 countries. The policy surprises are measured by both the surprise changes to the target federal funds rate (the target factor) and surprises in the future direction of the Federal Reserve monetary policy (the path factor). The results show that most international securitized real estate markets have significantly positive responses to surprise decrease in current or future expected federal funds rates, though such responses vary greatly across countries. Also, while the U.S. securitized real estate market reacts mainly to the target factor, foreign securitized real estate markets react to the path factor. Furthermore, we find that the cross-country variation in the response to the target factor is correlated with the country’s exchange rate regime and its degree of real economic and particularly financial integration, while the cross-country variation in the response to the path factor is mainly related to the country’s degree of financial integration.     

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.     

Does the Diversification Potential of Securitized Real Estate Vary Over Time and Should Investors Care?

This paper examines the dynamics of the covariance matrix of return rates for securitized real estate, other company stocks, and government bonds for a cross-section of eight countries. In-sample analysis establishes that in all countries the covariance matrix is time-varying and reacts stronger to bad than to good news. Using a realistic out-of-sample exercise, we find that portfolios selected with a forecasted dynamic covariance matrix are less risky than portfolios constructed with the static matrix. However, benefits of using the dynamic covariance matrix for active portfolio management are mostly offset by rebalancing cost. Passive buy-and-hold investors benefit, because the forecasted dynamic covariance matrix provides better risk assessment.     

Volatility Transmission in the Real Estate Spot and Forward Markets

How shocks in one market influence the returns and volatility of other markets has been an important question for portfolio managers. In the finance literature, many studies found evidence of volatility spillovers across international markets, as well as between spot and futures markets. Although real estate is often regarded as a good vehicle for diversification, the dynamics of its volatility transmission have been largely ignored. This paper provides the first study to examine volatility spillovers between the spot and forward (pre-sale) index returns of the Hong Kong real estate market through a bivariate GARCH model. Transaction-based indices were used so that our volatility modelling was free from any smoothing problem. Our results showed that real estate returns exhibited volatility clustering, and the volatility of the forward market was more sensitive to shocks than the spot market. Moreover, volatility was mainly transmitted from the forward market to the spot market, but not vice versa.

Stock market correlations during the financial crisis of 2008–2009: Evidence from 50 equity markets

Using data from 50 equity markets we examine conditional and unconditional correlations around two major banking events during the financial crisis of 2008–09. To measure the value of covariance information on the augmented DCC model used in the study, a portfolio in-sample estimation is performed. We show that by taking into account the change in the level of variance in high volatility periods, the estimates of the conditional covariance are more efficient in capturing the dynamics of the stock markets variance. Furthermore, in a two-asset allocation framework, the model consistently generates relatively low portfolio variances, implying substantial benefits in portfolio diversification.     

Volatility co-movements between emerging sovereign bonds: Is there segmentation between geographical areas?

This paper analyses the dynamic interrelationship between spreads on selected sovereign bonds issued by 10 emerging countries. It investigates the nature of the volatility transmission in secondary bond markets through conditional covariance estimates obtained by orthogonal methods. This approach, which combines PCA with GARCH volatility modelling, filters away idiosyncratic news and focuses on spreads dynamics driven by common factors. We find convincing evidence of co-movements between spread changes; more within than across geographical areas. Conditional covariations increase in periods of turbulence and subsequently subside. The time-varying minimum variance artificial portfolios, which are used here for model validation, show that, in spite of systemic risk, international portfolio diversification is still a powerful strategy for risk reduction.     

Net Asset Value Discounts for Asian-Pacific Real Estate Companies: Long-Run Relationships and Short-Term Dynamics

This study investigates the time series behavior of real estate company net asset value discount/premium (NAVDISC) in eight Asian-Pacific securitized real estate markets from 1995 to 2003. We postulate that if there is a stable NAVDISC for real estate companies in the long-run, then there should be a long-run cointegrating relation between their stock prices (Ps) and net asset values (NAVs). Employing panel data cointegration econometrics that comprises three approaches; panel unit root test, heterogeneous panel cointegration test and dynamic panel error-correction modeling (ECM), we find that long run NAVDISCs persist in individual Asian-Pacific securitized real estate markets and the regional market. All the NAVDISCs exhibit mean reversion and that the respective disequilibrium errors fluctuate around the mean values. Moreover, NAV is an important factor that statistically explains the price variations in real estate stock prices regardless of their speed of mean-reversion in the NAV discount /premium.     

Dynamic correlations and volatility linkages between stocks and sukuk: Evidence from international markets

An understanding of volatility and co-movements in financial markets is important for portfolio allocation and risk management practices. The current financial crisis caused a shrinkage in values of most assets, an increased volatility and a threat to the survival of several institutional investors. Managing risks and returns within the classic portfolio theory, when correlations across securities soar, is increasingly challenging. In this paper, we investigate the volatility behavior and the co-movements between sukuk and international stock indexes. Symmetric multivariate GARCH models with dynamic conditional correlations (DCC) were estimated under Student-t distribution. We provide evidence of high correlations between sukuk and US and EU stock markets, without finding the well-known flight to quality behavior affecting Islamic bonds. We also show that volatility linkages between sukuk and regional market indexes are higher during financial crisis. We argue that investors could obtain diversification benefits including sukuk in a well-diversified equity portfolio, given their lower volatility compared to equity. But higher volatility linkages and dynamic correlations during financial crises show that they are hybrid instruments between bonds and equity. Our findings are relevant for institutional investors and asset managers that include Islamic bonds in a diversified portfolio.     

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.

Do the Forward Sales of Real Estate Stabilize Spot Prices?

We examine the effect of forward sale (pre-sale) activities on the volatility of spot prices in the real estate market. The abundance of pre-sales data and major changes in regulatory control on the pre-sale market during the 90's in Hong Kong allow us to undertake empirical tests using Hong Kong's real estate data. Our results show that the volatility of spot prices increased significantly after forward sales were severely dampened by regulatory control measures introduced in 1994, but decreased again when the measures were partly relaxed in 1998. The results contribute to the long lasting debate on whether the introduction of a futures market reduces the volatility of spot prices. Previous studies were mainly conducted in markets with low transaction costs, notably financial markets. By utilizing the unique regulatory changes in the pre-sale market of Hong Kong, we are able to conduct an experiment on the conditional volatility of spot prices in a high information-cost environment, thereby shedding light on the important role of forward housing contracts in providing price expectation information for spot trading.     

Are REITs real estate? Evidence from international sector level data

The aim of this study is to examine whether securitized real estate returns reflect direct real estate returns or general stock market returns using international data for the U.S., U.K., and Australia. In contrast to previous research, which has generally relied on overall real estate market indices and neglected the potential long-term dynamics, our econometric evaluation is based on sector level data and caters for both the short-term and long-term dynamics of the assets as well as for the lack of leverage in the direct real estate indices. In addition to the real estate and stock market indices, the analysis includes a number of fundamental variables that are expected to influence real estate and stock returns significantly. We estimate vector error-correction models and investigate the forecast error variance decompositions and impulse responses of the assets. Both the variance decompositions and impulse responses suggest that the long-run REIT market performance is much more closely related to the direct real estate market than to the general stock market. Consequently, REITs and direct real estate should be relatively good substitutes in a long-horizon investment portfolio. The results are of relevance regarding the relationship between public and private markets in general, as the ‘duality’ of the real estate markets offers an opportunity to test whether and how closely securitized asset returns reflect the performance of underlying private assets. The study also includes implications concerning the recent financial crisis.     

Modeling Time-Varying Correlations in Volatility Between BRICS and Commodity Markets

This article investigates the asymmetric and long memory volatility properties and dynamic conditional correlations (DCCs) between Brazilian, Russian, Indian, Chinese, and South African (BRICS) stock markets and commodity (gold and oil) futures markets, using the trivariate DCC-fractionally integrated asymmetric power autoregressive conditional heteroskedasticity (FIAPARCH) model. We identify significant asymmetric and long memory volatility properties and DCCs for pairs of BRICS stock and commodity markets, and variability in DCCs and Markov Switching regimes during economic and financial crises. Finally, we analyze optimal portfolio weights and time-varying hedge ratios, demonstrating the importance of overweighting optimal portfolios between BRICS stock and commodity assets.     

On financial contagion and implied market volatility

This paper investigates volatility contagion across U.S. and European stock markets during the Global Financial Crisis (GFC) and the Eurozone Sovereign Debt Crisis (ESDC). Using a sample of international implied volatility indices on daily changes, I explore asymmetric conditional correlation dynamics across stable and crisis periods and across the different phases of both crises. Empirical evidence indicates the existence of contagion in cross-market volatilities. A different pattern of infection is observed across the phases, since the early phase of the GFC and the late period of escalation of the Euro crisis are the most contagious periods. This implies that the initial signal of the two crises has been differently recognized by implied volatility markets. The results provide important implications for the effectiveness of international portfolio diversification and volatility hedging during periods of negative shocks.