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Multiscale Analysis of International Linkages of REIT Returns and Volatilities

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Abstract

This paper extends the REIT literature on international market linkages by introducing a time scale dimension. In particular, we apply the maximum overlap discrete wavelet transform (MODWT) to seven major global REIT markets, and investigate their linkages among returns and volatilities at different time scales. Our findings suggest strong scale-dependency of the market linkages. Specifically, the linkage among returns generally increases with time scale, implying that portfolio diversification is most efficient at short time horizons. Moreover, the return linkage is found to be time varying and its dynamics varies across scales. In addition, results on the volatility linkage, which manifests itself through volatility comovements and spillover, show that volatility comovements generally strengthen as scale increases and volatility spillover varies across scales in terms of strength and direction. Our findings cast doubt on the use of the scale-free correlation coefficient as a universal measure of market linkage. Our findings can be utilized by time-scale-conscious investors to improve portfolio selection and risk management.

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Notes

  1. Dyadic size refers to a size which is multiples of 2.

  2. We do not estimate ρ at the sampling frequency of quarterly and yearly. The reason is that high levels of aggregation dramatically reduce the sample size: only 80 data points for quarterly and 20 for yearly. The small size prevents us from having reliable correlation estimates.

  3. Similar to the arguments made in the static case, different factors may cause the dynamic correlations to vary across time scales. Therefore, it is worthwhile to investigate how they cause the differences. However, given the large scope of such an investigation, it is more suitable for a follow-up study. We wish to thank an anonymous reviewer for raising this comment.

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Acknowledgements

We thank the Editor and an anonymous referee for their valuable comments and suggestions. All errors remain our own.

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Authors and Affiliations

  1. Real Estate and Housing, Department of Marketing and Consumer Studies, College of Management and Economics, University of Guelph, Guelph, ON, N1G 2W1, Canada

    Jian Zhou

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Correspondence to Jian Zhou.

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Zhou, J. Multiscale Analysis of International Linkages of REIT Returns and Volatilities. J Real Estate Finan Econ 45, 1062–1087 (2012). https://doi.org/10.1007/s11146-011-9302-7

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