The Journal of Real Estate Finance and Economics

, Volume 21, Issue 3, pp 279–296 | Cite as

Dynamics of Private and Public Real Estate Markets

  • Sorin A. Tuluca
  • F. C. Neil Myer
  • James R. Webb


Using five assets (T-bills, bonds, stocks, and both public and private real estate), this study investigates how cointegration of capital markets affects the dynamics of public and private real estate markets. The results show that the price indices of the five assets are nonstationary and cointegrated. Some implications for the long-term equilibrium relationship for portfolio diversification, price discovery and prediction are discussed. In a Granger causality framework, error-correction augmented VAR models (VECM) and unrestricted VAR models are compared with respect to the conclusion regarding the interaction between public and private real estate returns. VECM is also shown to improve the prediction of private real estate returns relative to an unrestricted VAR model. These results raise questions about previous research studies regarding the dynamics between public and private real estate returns. It is shown that the long-term equilibrium relationship establishes a feedback between the two real estate markets, but the private market seems to informationally lead the public one. Possible explanations are also explored.

real estate markets cointegration causality predictability 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Alexander, C., and A. Johnson. (1994). “Dynamic Links,” Risk February, 56-59.Google Scholar
  2. Ambrose, B. W., E. Ancel, and M. D. Griffiths. (1992). “The Fractal Structure of Real Estate Investment Trust Returns: The Search for Evidence of Market Segmentation and Nonlinear Dependency,” Journal of the American Real Estate and Urban Economics Association 20, 25-54.Google Scholar
  3. Barkham, R., and D. Geltner. (1995). “Price Discovery in American and British Property Markets,” Real Estate Economics 23, 21-44.Google Scholar
  4. Brenner, R. J., and K. F. Kroner. (1995). “Arbitrage, Cointegration, and Testing the Unbiasedness Hypothesis in Financial Markets,” Journal of Financial and Quantitative Analysis 30, 23-42.Google Scholar
  5. Brueggeman, W., and J. Fisher. (1997). Real Estate Finance and Investment. New York: Irwin, 10th edition.Google Scholar
  6. Caporale, G., and N. Pittis. (1998). “Cointegration and Predictability of Asset Prices,” Journal of International Money and Finance 17, 441-453.Google Scholar
  7. Chaudhry, M., Myer, F. C., and J. Webb. (1999). “Stationarity and Cointegration in Systems with Real Estate and Financial Assets,” Journal of Real Estate Finance and Economics 18, 339-349.Google Scholar
  8. Damodaran, A., and C. Liu. (1993). “Insider Trading as a Signal of Private Information,” The Review of Financial Studies 6, 79-119.Google Scholar
  9. Engle, R., and C. Granger. (1987). “Co-Integration and Error Correction. Representation, Estimation, and Testing,” Econometrica 55, 251-276.Google Scholar
  10. Engle, R., and B. Yoo. (1987). “Forecasting and Testing in Co-Integrated Systems,” Journal of Econometrics 35, 143-159.Google Scholar
  11. Goetzmann, W., and R. Ibbotson. (1990). “The Performance of Real Estate as an Asset Class,” Journal of Applied Corporate Finance 3, 65-76.Google Scholar
  12. Geltner, D., and J. Mei. (1995). “The Present Value ModelWith Time-Varying Discount Rates: Implications For Commercial Property Valuation and Investment Decisions,” Journal of Real Estate Finance and Economics 11, 119-135.Google Scholar
  13. Geltner, D. (1996). “The Repeated-Measures Regression-Based Index: A Better Way to Construct Appraisal-Based Indexes of Commercial Property Value,” Real Estate Finance 12, 29-35.Google Scholar
  14. Geltner, D. (1993). “Estimating Market Values from Appraised Values without Assuming an Efficient Market,” The Journal of Real Estate Research 8, 325-345.Google Scholar
  15. Geltner, D. (1991). “Smoothing in Appraisal-Based Returns,” Journal of Real Estate Finance and Economics 4, 327-34.Google Scholar
  16. Ghosh, A. (1995). “The Hedging Effectiveness of ECU Futures Contracts: Forecasting Evidence from an Error Correction Model,” The Financial Review 30, 567-582.Google Scholar
  17. Granger, C., and N. Haldrup. (1996). “Separation in Cointegrated Systems, Long Memory Components and Common Stochastic Trends,” Working Paper No. 1996-3, University of Aarhus, Denmark.Google Scholar
  18. Granger, C. (1988). “Some Recent Developments on the Concept of Causality,” Journal of Econometrics 39, 199-211.Google Scholar
  19. Grauer, R., and N. Hakansson. (1995). “Gains from Diversifying into Real Estate: Three Decades of Portfolio Returns Based on the Dynamic Investment Model,” Real Estate Economics 23, 117-159.Google Scholar
  20. Gyourko, J., and D. Keim (1992). “What Does the Stock Market Tell Us About Real Estate Returns,” AREUEA Journal 20, 457-485.Google Scholar
  21. Hargreaves, C. P., editor. (1994). Nonstationary Time Series Analysis and Cointegration. Oxford University Press.Google Scholar
  22. Harris, H., McInish, T.H., Shoesmith, G.L., and R.A. Wood. (1995). “Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets,” Journal of Financial and Quantitative Analysis 30, 563-579.Google Scholar
  23. Johansen, S. (1988). “Statistical Analysis Of The Cointegrating Vectors,” Journal of Economic Dynamics and Control 12, 231-254.Google Scholar
  24. Johansen, S. and K. Juselius. (1990). “Maximum Likelihood Estimation and Inference an Cointegration-With Applications to the Demand for Money,” Oxford Bulletin of Economics and Statistics, 169-210.Google Scholar
  25. Karolyi, G. A., and A. B. Sanders. (1998). “The Variation of Economic Risk Premiums in Real Estate Returns,” Journal of Real Estate Finance and Economics 17, 245-262.Google Scholar
  26. Katsimbris, G., and S. Miller. (1993). “Interest Rate Linkages within the European Monetary System: Further Analysis,” Journal of Money, Credit and Banking 25, 771-780.Google Scholar
  27. Ling, D. C., and A. Naranjo. (1999). “The Integration of Commercial Real Estate Markets and Stock Markets,” Real Estate Economics 27, 483-515.Google Scholar
  28. Liu, C., Hartzell, D., Grieg, W., and T. Grissom. (1990). “The Integration of the Real Estate Market and the Stock Market: Some Preliminary Evidence,” Journal of Real Estate Finance and Economics 3, 261-282.Google Scholar
  29. Liu, C., and J. Mei. (1992). “The Predictability of Returns on Equity REITs and Their Co-Movement with Other Assets,” Journal of Real Estate Finance and Economics 5, 401-418.Google Scholar
  30. Markowitz, H. (1952). “Portfolio Selection,” Journal of Finance 7, 77-91.Google Scholar
  31. McCallum, B. T. (1993). “Unit Roots in Macroeconomic Time Series: Some Critical Issues,” NBER Working Paper No. 4368Google Scholar
  32. Mei, J., and C. Liu. (1993). “The Predictability of Real Estate Returns and Market Timing,” Journal of Real Estate Finance and Economics 8, 115-135.Google Scholar
  33. Myer, F., and J. Webb. (1993). “The Effect of Benchmark Choice on Risk-Adjusted Performance Measures for Commingled Real Estate Funds,” The Journal of Real Estate Research 8, 189-203.Google Scholar
  34. Mei, J., and A. Lee. (1994). “Is There a Real Estate Factor Premium?” Journal of Real Estate Finance and Economics 9, 113-126.Google Scholar
  35. Nicholson, W. (1994). Intermediate Microeconomics and Its Application. The Dryden Press.Google Scholar
  36. Ross, S. A. (1987). “The Interrelation of Finance and Economics: Theoretical Perspectives,” American Economic Review 77, 29-34.Google Scholar
  37. Ross, S. A., and R. C. Zisler. (1991). “Risk and Return in Real Estate,” Journal of Real Estate Finance and Economics 4, 175-190.Google Scholar
  38. Sa-Aadu, J. J. D. Shilling, and A. Tiwan. (1999). “Common Risk Factors and Expected Returns on Real Estate and other Financial Assets,” Paper presented at the Financial Management Association, Orlando, Fl. 1999.Google Scholar
  39. Seck, D. (1996). “The Substitutability of Real Estate Assets,” Real Estate Economics 24, 75-95.Google Scholar
  40. Sims, C. (1980). “Macroeconomics and Reality,” Econometrica 48, 1-4.Google Scholar
  41. Stock, J., and M. Watson. (1988). “Testing for Common Trends,” Journal of the American Statistical Association 83, 1097-1107.Google Scholar
  42. Tuluca, S., Seiler, M., Myer, F. C., and J. Webb. (1998). “Cointegration in Return Series and Its Effect on Short-Term Prediction,” Managerial Finance 24, 48-63.Google Scholar
  43. Wilson, P. J., Okunev, J., and J. Webb. (1998). “Step Intervention and Market Integration: Tests in the U.S., U.K., and Australian Property Markets,” Journal of Real Estate Finance and Economics 16, 91-123.Google Scholar

Copyright information

© Kluwer Academic Publishers 2000

Authors and Affiliations

  • Sorin A. Tuluca
    • 1
  • F. C. Neil Myer
    • 2
  • James R. Webb
    • 3
  1. 1.Department of Finance, Samuel J. Silberman College of BusinessFairleigh Dickinson UniversityMadison
  2. 2.Department of Finance, James J. Nance College of BusinessCleveland State UniversityCleveland
  3. 3.Department of Finance, James J. Nance College of BusinessCleveland State UniversityCleveland

Personalised recommendations