Contagion Channels between Real Estate and Financial Markets

The recent crisis has demonstrated the linkages between asset classes within a country as well as the association between assets internationally. We provide for a better understanding of some of these linkages by conducting an empirical investigation of the channels underlying the risk of contagion between real estate investment trusts (REITs) and stocks in the United States. We test for three financial mechanisms potentially driving contagion. A behavioral dimension in the crisis propagation is also examined by considering investor sentiment and panic risk. We find that contagion prevails between REITs and stocks and that this phenomenon is driven by behavioral and liquidity mechanisms.     

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.     

Commonality in Liquidity and Real Estate Securities

We conduct an empirical investigation of the exposure of U.S. REIT returns to commonality in liquidity. Taking advantage of the specific characteristics of REITs, we study three types of commonality in liquidity: within-asset commonality, cross-asset commonality (with the stock market), and commonality with the underlying property market. We find evidence that the three types of commonality in liquidity represent significant risk factors for REIT returns but only during bad market conditions. We also find that using a linear approach, rather than a conditional, would have underestimated the role of commonality in liquidity risk. This could explain (at least partly) the small impact of commonality on asset prices documented in the extant literature. We also analyze the economic sources of commonality in liquidity and find that demand-side factors prevail over supply-side factors.