Abstract
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.
Similar content being viewed by others
Notes
The “America (AME)” regional index has two constituents: the USA and Canada country indices.
Each time series has 267 monthly return data. This full sample is divided into five sub-samples that contain 53 monthly return data per time series (ignoring the last two observations). This approach will allow us to conduct the simple t-test to assess the instability of correlation matrix between any two sub-periods that have equal number of monthly observations; that is, a time series that contain 53 monthly observations each for the five shorter sample periods (53 × 5 = 275); and ignores the last two observations. An alternative method is to use Jenrich test.
It may be difficult to come out with a unanimous agreement on the periods of stock market crash and Asian financial crisis for all countries. Following previous literature, the stock market crash dummy is set from 10/1987 to 12/1987 (3months) and the Asian financial crisis dummy is set from 1/1997 to 6/1998 (18months) to encompass the short time before and after the crisis period.
It has to be cautioned that a constant linear trend is not consistent with the definition of a correlation coefficient. Other forms of trend can be modeled, but no theory exists of the exact form of this trend. Also, as with any time-series study, the starting date can be of importance and render any conclusion somewhat different.
All the correlation and volatilities series are stationary as verified by the usual ADF tests. For each market pair, the two market volatilities have some multicollinearity and disentangling the effects might be difficult. On the other hand, including only one volatility coefficient reduces the Adjusted R2 significantly.
Following the usual procedure, we include those dominant factors that have eigenvalues greater than or equal to one.
References
Bollerslev, T. (1990). Modeling the coherence in short-run nominal exchange rates: A multivariate generalized ARCH model. Review of Economics and Statistics, 72, 498–505.
Bollerslev, T., Chou, R. Y., & Kroner, K. F. (1992). ARCH modeling in finance: A review of the theory and empirical evidence. Journal of Econometrics, 52, 5–59.
Clayton, J., & MacKinnon, G. (2003). The relative importance of stock, bond and real estate factors in explaining REIT returns. Journal of Real Estate Finance and Economics, 27(1), 39–60.
Cotter, J., & Stevenson, S. (2006). Multivariate modeling of daily REIT volatility. Journal of Real Estate Finance and Economics, 32, 305–325.
Eichholtz, P. M. A. (1996a). Does international diversification work better for real estate than for stocks and bonds. Financial Analysts Journal, 52(1), 56–62.
Eichholtz, P. M. A. (1996b). The stability of the covariances of international property share returns. Journal of Real Estate Research, 11(2), 149–158.
Engle, R. (2002). Dynamic conditional correlation: a simple class of multivariate generalized autoregressive conditional heteroskedasticity models. Journal of Business and Economic Statistics, 20(3), 339–350.
Glosten, L., Jagannathan, R., & Runkle, D. (1993). On the relation between the expected value and volatility of nominal excess return on stock. Journal of Finance, 48, 1779–1801.
Gordon, J., & Canter, T. (1999). Institutional real estate securities: a test of capital market integration. Journal of Real Estate Portfolio Management, 5(2), 161–170.
Hu, J., & Mei, J. P. (1999). The risk and return of emerging markets property stock indexes. Emerging Markets Quarterly, 3(1), 10–21.
Kallberg, J. G., Liu, C. H., & Pasquariello, P. (2002). Regime shifts in Asian equity and real estate markets. Real Estate Economics, 30(2), 263–292.
Kaplanis, E. C. (1988). Stability and forecasting of the co-movement measures of international stock market returns. Journal of International Money and Finance, 7, 63–75.
Ling, D. C., & Naranjo, A. (1999). The integration of commercial real estate markets and stock markets. Real Estate Economics, 27(3), 483–515.
Liow, K. H., & Sim, M. (2006). The risk and return profile of Asian listed real estate stocks. Pacific Rim Property Research Journal, 12(3), 283–310.
Liow, K. H., & Yang, H. (2005). Long-term co-memories and short-run adjustment: securitized real estate and stock markets. Journal of Real Estate Finance and Economics, 31(3), 283–300.
Longin, F., & Solnik, B. (1995). Is the correlation in international equity returns constant: 1960–1990. Journal of International Money and Finance, 14(1), 3–26.
Lu, K., & Mei, J. P. (1999). The return distributions of property shares in emerging markets. Journal of Real Estate Portfolio Management, 5(2), 145–160.
Mei, J. P., & Hu, J. (2000). Conditional risk premium of Asian real estate stocks. Journal of Real Estate Finance and Economics, 21(3), 297–313.
Michayluk, D., Wilson, P., & Zurbruegg, R. (2006). Asymmetric volatility, correlation and return dynamics between the US and UK securitized real estate markets. Real Estate Economics, 34(1), 109–131.
Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica, 59, 347–370.
Newell, G., & Acheampong, P. (2001). The dynamics of the Australian property trust market risk and correlation profile. Pacific Rim Property Research Journal, 7(4), 259–270.
Okunuv, J., & Wilson, P. (1997). Using non-linear tests to examine integration between real estate and stock markets. Real Estate Economics, 25(3), 487–503.
Okunuv, J., Wilson, P., & Zurbruegg, R. (2000). The causal relationship between real estate and stock markets. Journal of Real Estate Finance and Economics, 21(3), 251–261.
Solnik, B., Boucrelle, C., & Fur, Y. L. (1996). International market correlation and volatility. Financial Analysts Journal, 52(5), 17–34.
Tse, Y. K., & Tsui, A. K. (2002). Multivariate generalized autoregressive conditional heteroskedasticity model with time-varying correlations. Journal of Business and Economic Statistics, 20(3), 351–362.
Wilson, P., & Zurbruegg, R. (2004). Contagion or interdependence? Evidence from co-movements on Asia-Pacific securitized real estate markets during the 1997 crisis. Journal of Property Investment and Finance, 22(5), 401–413.
Worzala, E., & Sirmans, C. F. (2003). Investing in international real estate stocks: a review of the literature. Urban Studies, 40(5/6), 1115–1149.
Yang, S. Y. (2005). A DCC analysis of international stock market correlations: the role of Japan on the Asian Four Tigers. Applied Financial Economics Letters, 1, 89–93.
Zakoian, J. M. (1994). Threshold heteroskedastic models. Journal of Economic Dynamics and Control, 18, 931–995.
Acknowledgement
The authors would like to thank an anonymous reviewer, whose constructive comments and suggestions helped improve the paper. Any remaining errors and omissions are the responsibility of the authors.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Liow, K.H., Ho, K.H.D., Ibrahim, M.F. et al. Correlation and Volatility Dynamics in International Real Estate Securities Markets. J Real Estate Finan Econ 39, 202–223 (2009). https://doi.org/10.1007/s11146-008-9108-4
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11146-008-9108-4