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Abstract
We empirically explore integration among US, UK, Japanese and Australian securitised real estate markets and their interdependencies from the global stock market based on dynamic conditional correlation analysis and conditional return‐volatility beta methodology. Results imply that international links have been increasing over time, especially for the largest securitised real estate markets and the global stock market, although their integration process has been much slower than among the corresponding stock markets and from the global stock market. In addition, the conditional return‐volatility beta analyses indicate the four real estate securities markets do not share the same volatility process. Our analyses and results have important implications for international real estate portfolio diversification.
Notes
1. In contrast, we focus on evidence on securitised real estate by including the top four global real estate markets (US, UK, Japan and Australia). Please read the data section for additional information on this four markets.
2. GARCH models are deployed to explore the stochastic behaviour of financial time series and, in particular, to explain the behaviour of the return volatility over time (Bollerslev et al., Citation1992). The constant conditional correlation (CCC) multivariate (MGARCH) model, which was proposed by Bollerslev (Citation1990) as an alternative to the computationally intensive VECH model, is the most widely used MGARCH model in the last decade. Setting all conditional correlations to be constant, the CCC MGARCH model allows for the conditional variance equation to take any form of the univariate GARCH process. However, the assumption that the conditional correlations are constant may appear unrealistic in many empirical applications.
3. Asymmetric GARCH models include Nelson’s (Citation1991) exponential GARCH model, Glosten, Jagannathan and Runkle’s (Citation1993) GJR‐GARCH model and Zakoian’s (Citation1994) threshold GARCH model.
4. Note here (and also throughout the analysis), a comparison is made between real estate securities and equity markets generally at the national and global level. This means that we are comparing a single industry sector against a diversified, in industry terms, market. It follows that if we consider other individual equity sectors, it is likely that we would find similar results. We would like to thank a reviewer for raising this comment. In response to this concern, we have tried our analysis in re‐phrasing the interpretation of the findings where appropriate. Also, in line with the modern literature, we adopt the perspective that listed securitised real estate (real estate securities), being traditionally considered as an equity sector, can also be regarded as one of the most important indirect vehicles for real estate investment, providing investors with liquidity, sector divisibility and diversification with low costs, and that global mixed‐asset portfolios gain significant diversification and risk‐adjusted performance benefits by adding global real estate securities (RREEF Research, Citation2007).