Direct real estate, securitized real estate, and equity market dynamic connectedness

ABSTRACT

The paper’s objective is to scrutinize the dynamics of connectedness across returns of three markets, including direct real estate, securitized real estate, and stock markets. Through the connectedness index approach, the results indicate a significant degree of connectedness, which increases sharply during the recent global financial crisis. The net directional connectedness is volatile and time-dependent, yet the dominant shock transmitting role of the securitized real estate is pronounced during the GFC. While the direct real estate market plays as a dominant shock information receiver from the markets of securitized real estate and stocks in Australia, Canada, France, and the UK, it appears to shape other markets in the context of the US. Given the fact that the securitized real state is considered as the hybrid of the conventional real estate market and the stock market, we further note that the securitized real estate is more linked with its underlying market. Several implications for investors and policymakers are discussed.

KEYWORDS:

• Connectedness
• real estate market
• securitized real estate
• stock market

JEL CLASSIFICATION:

• C32
• G11
• G12

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The paper’s empirical results are based on a forecast horizon of 4. We run the connectedness analysis with forecast horizons ranging from 2 to 6 quarters to validate our results to the choice of forecast horizons. The total connectedness plot in Figure 6 is not sensitive to changes in the forecasting horizon.