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The Journal of Real Estate Finance and Economics

, Volume 48, Issue 2, pp 299–322 | Cite as

Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Futures

  • Chyi Lin Lee
  • Simon Stevenson
  • Ming-Long Lee
Article

Abstract

In 2007 futures contracts were introduced based upon the listed real estate market in Europe. Following their launch they have received increasing attention from property investors, however, few studies have considered the impact their introduction has had. This study considers two key elements. Firstly, a traditional Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model, the approach of Bessembinder & Seguin (1992) and the Gray’s (1996) Markov-switching-GARCH model are used to examine the impact of futures trading on the European real estate securities market. The results show that futures trading did not destabilize the underlying listed market. Importantly, the results also reveal that the introduction of a futures market has improved the speed and quality of information flowing to the spot market. Secondly, we assess the hedging effectiveness of the contracts using two alternative strategies (naïve and Ordinary Least Squares models). The empirical results also show that the contracts are effective hedging instruments, leading to a reduction in risk of 64 %.

Keywords

Real estate securities futures GARCH Volatility Hedging effectiveness and Europe 

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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.School of BusinessUniversity of Western SydneyPenrithAustralia
  2. 2.School of Real Estate and Planning, Henley Business SchoolUniversity of Reading, WhiteknightsReadingUK
  3. 3.Department of FinanceNational Dong Hwa UniversityShoufengTaiwan

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