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Correlation and Volatility Dynamics in International Real Estate Securities Markets

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Abstract

We study international correlation and volatility dynamics of publicly traded real estate securities using monthly returns from 1984 and 2006. We also examine, for comparison, the correlations among the corresponding stock markets. A multivariate dynamic conditional correlation model captures the time-varying correlation within the full period. We confirm lower correlations between all real estate securities market returns than those between the stock market returns themselves. Some significant variations and structural changes in the correlation structure happened within the sample period. We detect a strong and positive connection between real estate securities market correlations and their conditional volatilities. We also find the international correlation structure of real estate securities and the broader stock market are linked to each other. Our results have economic motivations regarding the potential integration of international real estate securities markets and the possibility of including information on changing correlations and volatilities to design more optimal portfolios for international real estate securities.

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Notes

  1. The “America (AME)” regional index has two constituents: the USA and Canada country indices.

  2. Each time series has 267 monthly return data. This full sample is divided into five sub-samples that contain 53 monthly return data per time series (ignoring the last two observations). This approach will allow us to conduct the simple t-test to assess the instability of correlation matrix between any two sub-periods that have equal number of monthly observations; that is, a time series that contain 53 monthly observations each for the five shorter sample periods (53 × 5 = 275); and ignores the last two observations. An alternative method is to use Jenrich test.

  3. It may be difficult to come out with a unanimous agreement on the periods of stock market crash and Asian financial crisis for all countries. Following previous literature, the stock market crash dummy is set from 10/1987 to 12/1987 (3months) and the Asian financial crisis dummy is set from 1/1997 to 6/1998 (18months) to encompass the short time before and after the crisis period.

  4. It has to be cautioned that a constant linear trend is not consistent with the definition of a correlation coefficient. Other forms of trend can be modeled, but no theory exists of the exact form of this trend. Also, as with any time-series study, the starting date can be of importance and render any conclusion somewhat different.

  5. All the correlation and volatilities series are stationary as verified by the usual ADF tests. For each market pair, the two market volatilities have some multicollinearity and disentangling the effects might be difficult. On the other hand, including only one volatility coefficient reduces the Adjusted R2 significantly.

  6. Following the usual procedure, we include those dominant factors that have eigenvalues greater than or equal to one.

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Acknowledgement

The authors would like to thank an anonymous reviewer, whose constructive comments and suggestions helped improve the paper. Any remaining errors and omissions are the responsibility of the authors.

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Authors and Affiliations

  1. Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore, 117566, Singapore

    Kim Hiang Liow, Kim Hin David Ho, Muhammad Faishal Ibrahim & Ziwei Chen

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  1. Kim Hiang Liow
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  2. Kim Hin David Ho
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  3. Muhammad Faishal Ibrahim
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  4. Ziwei Chen
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Correspondence to Kim Hiang Liow.

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Liow, K.H., Ho, K.H.D., Ibrahim, M.F. et al. Correlation and Volatility Dynamics in International Real Estate Securities Markets. J Real Estate Finan Econ 39, 202–223 (2009). https://doi.org/10.1007/s11146-008-9108-4

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  • DOI: https://doi.org/10.1007/s11146-008-9108-4

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