Volatility Transmission: Evidence from U.K. REIT & Stock Market Implied Volatility

Abstract

This paper investigates volatility transmission in the U.K. REIT market. It considers how REIT volatility is related to implied volatility in both the overall stock market as well as that derived from traded options on REIT stocks. The multivariate analysis utilizes both Constant Conditional Correlation (CCC) and Dynamic Conditional Correlation (DCC) GARCH specifications to analyse the interdependence of the data. The findings confirm the presence of volatility transmission across the implied volatility of U.K. REITs, the U.K. implied volatility index, and the U.K. REIT index. The study also applies the variance decomposition approach proposed by Diebold and Yilmaz to examine spillover effects.

Keywords:

• REIT volatility transmission
• implied volatility
• variance decomposition

Data Availability Statement

The data used for this research was accessed from a third party and is subject to commercial restrictions, so the supporting data are not available.

Notes

1 See studies such as Chan et al. (1998), Downs (1998), Feng et al. (2011) and Wang et al. (1995) for further discussions about various aspects of the development of the U.S. REIT market.

2 For example, REITs were only introduced in the following markets post 2000; France (2003), Germany (2007), Hong Kong (2003), Japan (2000), Korea (2001), Singapore (2002) and the UK (2007)

3 See Giot (2005); Whaley (2009); Chiang (2012); Emna and Myriam (2017); Bekaert and Hoerova (2014).

4 See also Bai et al. (2015) and Ertugrul et al. (2008) who consider interday data.

5 In addition to the REIT volatility papers already discussed there is also an extensive literature that has specifically considered forecasting REIT volatility, for example, Bonato et al. (2022), Zhou (2020) and Zhou and Kang (2011).

6 Check Sheppard (2013) and Silvennoinen and Teräsvirta (2007) for comprehensive details about the CCC GARCH and DCC GARCH.