Are there bubbles in the REITs market? New evidence using regime-switching approach

Abstract

This study looks for the presence of rational speculative bubbles in Real Estate Investment Trusts (REITs) using unit-root, variance ratio, duration dependence and regime switching regression tests. The regime switching method provides weak evidence of speculative bubble behaviour in both the mortgage and hybrid REITs sectors even though traditional econometric bubble tests do not provide evidence of rational speculative bubbles in all REIT markets. Findings suggest that price movement in mortgage and hybrid REITs may be induced by bubble-like behaviour of investors. This behaviour may be traced to the real estate market bubble. Our results provide evidence that the real estate bubble that started in early 2000 was transmitted into securitized real estate markets. A regime switching model also provides a clear metric that signals the probability of a collapsing bubble. This is something with the potential to be appreciably helpful to portfolio managers.

Keywords:

• rational speculative bubbles
• REITs; regime-switching tests
• duration dependence tests

JEL Classification::

• C22
• C41
• L85
• R33

Acknowledgements

The authors thank Dr Ahmet Tezel, Dr Eric Girard and Dr Jeffrey Withworth for their helpful comments and suggestions. Also, we highly appreciate the immense help provided by Dr Jeff Glauner during the preparation of this manuscript. We also thank two anonymous referees whose comments and suggestions have improved the quality of this study.

Notes

¹ Gürkaynak (2005) provides a comprehensive reference about the econometric tests for speculative bubbles.

² Brooks and Katsaris (2006) provide a comprehensive explanation of the Van Norden and Schaller model.

³ McQueen and Thorley (1994) and Jirasakuldech et al. (2006) provide a detailed description of the duration dependence.