Price Discovery in Real Estate Markets: A Dynamic Analysis |
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Authors: | Abdullah Yavas Yildiray Yildirim |
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Institution: | (1) Smeal College of Business Administration, Pennsylvania State University, University Park, PA 16802, USA;(2) Whitman School of Management, Syracuse University, Syracuse, NY 13244, USA |
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Abstract: | 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. |
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