Integration of International Office Markets and Signal Extraction

Abstract

Executive Summary.The paper examines whether three international office markets—London City, New York City, and Tokyo CBD—are linked by a long-run relationship. The greater economic and financial market linkages and cross-border capital flows have increased the possibility that the markets are integrated. Johansen tests establish cointegration between total return indices. Hence, London City, New York City, and Tokyo form an equilibrium relationship, deviations from which can prompt portfolio reallocations to exploit opportunities or reduce risk. The findings show that London City adjusts more strongly to the deviations from the long-run path than the other two markets. At the end of 2007, prices in both London City and Tokyo were above equilibrium with Tokyo particularly so, whereas New York City was below equilibrium. The analysis suggests that New York City will benefit from this disequilibrium situation among the three cities.