Skip to main content
SpringerLink
Log in

Fractional Cointegration Analysis of Securitized Real Estate

  • Published:
The Journal of Real Estate Finance and Economics Aims and scope Submit manuscript

Abstract

This paper uses fractional cointegration analysis to examine whether long-run relations exist between securitized real estate returns and three sets of variables frequently used in the literature as the factors driving securitized real estate returns. That is, we examine whether such relationships are characterized by long memory (long-range dependence), short memory (short-range dependence), mean reversion (no long-run effects) or no mean reversion (no long-run equilibrium). The forecasting implications are also considered. Empirical analyses are conducted using data for the U.S., the U.K., and Australia. We find strong evidence of fractional cointegration between securitized real estate and the three sets of variables. Such relationships are mainly characterized by short memory although long memory is sometimes present. The use of fractional cointegration for forecasting purposes proves particularly useful since the start of the financial crisis.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3

Similar content being viewed by others

Notes

  1. Long (short) memory entails that the correlation with past quarterly observations decays slowly (exponentially).

  2. As of the end of 2008, the average debt/equity ratio of the five largest real estate securities in each country was 3.19 in the U.S., 1.68 in the U.K., and 0.95 in Australia.

  3. The FTSE/NAREIT series starts in 1977Q4 for the U.S. and in 1989Q4 for the U.K. and Australia, while the GPR series are available for the three countries since 1983Q4. Hence, different data sources are used for securitized real estate in order to have the longest series possible in each country.

  4. We use the MUPFI, a widely used benchmark for the Australian direct real estate market, as the Property Council of Australia (PCA) index is only available at a quarterly frequency since 1995Q2 (at a semi-annual frequency since 1984H2). At a semi-annual frequency, the correlation between the PCA index and the MUPFI is 0.96 for the period 1985H1 to 2009H1.

  5. For further details concerning the construction methodology of the TBI, see Fisher et al. (2007).

  6. For a review of the theory and empirical applications of this methodology, see Hargreaves (1994).

  7. Note that a large value of n may contaminate the estimation of d due to the high/medium frequency components, but a small value of n will lead to imprecise estimates due to the limited degrees of freedom.

  8. The optimal number of lags used for each set of explanatory variables is determined according to the Schwarz Bayesian information criterion (SBC). The longest specification tested included four lags and the SBC criterion led to an optimal number of lags of one for the three models.

  9. In the U.S., this is true when the transaction-based data are employed, but not when the unsmoothed appraisal-based data is used.

References

  • Antoniou, A., Garrett, I., & Priestley, R. (1998). Macroeconomic variables as common pervasive risk factors and the empirical content of the arbitrage pricing theory. Journal of Empirical Finance, 5(3), 221–240.

    Article  Google Scholar 

  • Aylward, A. & Glen, J. (2000). Some international evidence on stock prices as leading indicators of economic activity. Applied Financial Economics, 10(1), 1–14.

    Article  Google Scholar 

  • Baillie, R. T. & Bollerslev, T. (1994). Cointegration, fractional cointegration, and exchange rate dynamics. Journal of Finance, 49(2), 737–745.

    Article  Google Scholar 

  • Barkham, R. & Geltner, D. (1995). Price discovery in American and British property markets. Real Estate Economics, 23(1), 21–44.

    Article  Google Scholar 

  • Beenstock, M. & Chan, K. F. (1986). Testing the arbitrage pricing theory in the United Kingdom. Oxford Bulletin of Economics and Statistics, 48(2), 121–141.

    Article  Google Scholar 

  • Bharati, R. & Gupta, M. (1992). Asset allocation and predictability of real estate returns. Journal of Real Estate Research, 7(4), 469–484.

    Google Scholar 

  • Brooks, C. & Tsolacos, S. (1999). The impact of economic and financial factors on UK property performance. Journal of Property Research, 16(2), 139–152.

    Article  Google Scholar 

  • Brooks, C. & Tsolacos, S. (2001). Forecasting real estate returns using financial spreads. Journal of Property Research, 18(3), 235–248.

    Article  Google Scholar 

  • Brooks, C. & Tsolacos, S. (2003). International evidence on the predictability of returns to securitized real estate assets: econometric models versus neural networks. Journal of Property Research, 20(2), 133–155.

    Article  Google Scholar 

  • Campbell, J. Y. (1987). Stock returns and the term structure. Journal of Financial Economics, 18(2), 373–399.

    Article  Google Scholar 

  • Chan, K. C., Hendershott, P. H., & Sanders, A. B. (1990). Risk and return on real estate: Evidence from equity REITs. Real Estate Economics, 18(4), 431–452.

    Article  Google Scholar 

  • Chan, L. K. C. & Lakonishok, J. (1993). Institutional trades and intra-day stock price behavior. Journal of Financial Economics, 33(2), 173–199.

    Article  Google Scholar 

  • Chen, N. F., Roll, R., & Ross, S. A. (1986). Economic forces and the stock market. Journal of Business, 59(3), 383–403.

    Article  Google Scholar 

  • Chen, S. J., Hsieh, C., Vines, T. W., & Chiou, S. N. (1998). Macroeconomic variables, firm-specific variables and returns to REITs. Journal of Real Estate Research, 16(3), 269–277.

    Google Scholar 

  • Cheng, A. C. S. (1995). The UK stock market and economic factors: A new approach. Journal of Business Finance and Accounting, 22(1), 129–142.

    Article  Google Scholar 

  • Cheung, Y. W. & Lai, K. S. (1993). A Fractional cointegration analysis of purchasing power parity. Journal of Business and Economic Statistics, 11(1), 103–112.

    Article  Google Scholar 

  • Cheung, Y. W. & Lai, K. S. (1999). Macroeconomic determinants of long-term stock market comovements among major EMS countries. Applied Financial Economics, 9(1), 73–86.

    Article  Google Scholar 

  • Cheung, Y. W. & Ng, L. K. (1998). International evidence on the stock market and aggregate economic activity. Journal of Empirical Finance, 5(3), 281–296.

    Article  Google Scholar 

  • Clare, A. D. & Thomas, S. H. (1994). Macroeconomic factors, the APT and the UK stock market. Journal of Business Finance and Accounting, 21(3), 309–330.

    Article  Google Scholar 

  • Clayton, J. & MacKinnon, G. (2001). The time-varying nature of the link between REIT, real estate and financial asset returns. Journal of Real Estate Portfolio Management, 7(1), 43–54.

    Google Scholar 

  • Clayton, J. & MacKinnon, G. (2003). The relative importance of stock, bond and real estate factors in explaining REIT returns. Journal of Real Estate Finance and Economics, 27(1), 39–60.

    Article  Google Scholar 

  • Diacogiannis, G. P. (1986). Arbitrage pricing model: A critical examination of its empirical applicability for the London stock exchange. Journal of Business Finance and Accounting, 13(4), 489–504.

    Article  Google Scholar 

  • Engle, R. F. & Granger, C. W. J. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251–276.

    Article  Google Scholar 

  • Ewing, B. T. & Payne, J. E. (2005). The response of real estate investment trust returns to macroeconomic shocks. Journal of Business Research, 58(3), 293–300.

    Article  Google Scholar 

  • Fama, E. F. & French, K. R. (1989). Business conditions and expected returns on stocks and bonds. Journal of Financial Economics, 25(1), 23–49.

    Article  Google Scholar 

  • Fama, E. F. & Gibbons, M. R. (1984). A comparison of inflation forecasts. Journal of Monetary Economics, 13(3), 327–348.

    Article  Google Scholar 

  • Fifield, S. G. M., Power, D. M., & Sinclair, C. D. (2002). Macroeconomic factors and share returns: An analysis using emerging market data. International Journal of Finance and Economics, 7(1), 51–62.

    Article  Google Scholar 

  • Fisher, J., Geltner, D., & Pollakowski, H. (2007). A quarterly transactions-based index of institutional real estate investment performance and movements in supply and demand. Journal of Real Estate Finance and Economics, 34(1), 5–33.

    Article  Google Scholar 

  • Fisher, J. D., Geltner, D. M., & Webb, R. B. (1994). Value indices of commercial real estate: A comparison of index construction methods. Journal of Real Estate Finance and Economics, 9(2), 137–164.

    Article  Google Scholar 

  • Geltner, D. (1993). Estimating market values from appraised values without assuming an efficient market. Journal of Real Estate Research, 8(3), 325–345.

    Google Scholar 

  • Geweke, J. & Porter-Hudak, S. (1983). The estimation and application of long-memory time series models. Journal of Time Series Analysis, 4(4), 221–238.

    Article  Google Scholar 

  • Giliberto, S. M. (1990). Equity real estate investment trusts and real estate returns. Journal of Real Estate Research, 5(2), 259–263.

    Google Scholar 

  • Glascock, J. L., Lu, C., & So, R. W. (2000). Further evidence on the integration of reit, bond, and stock returns. Journal of Real Estate Finance and Economics, 20(2), 177–194.

    Article  Google Scholar 

  • Groenewold, N. & Fraser, P. (1997). Share prices and macroeconomic factors. Journal of Business Finance and Accounting, 24(9–10), 1367–1383.

    Article  Google Scholar 

  • Gyourko, J. & Keim, D. B. (1992). What does the stock market tell us about real estate returns? Real Estate Economics, 20(3), 457–485.

    Article  Google Scholar 

  • Hargreaves, C. P. (1994). Nonstationary time series analysis and cointegration. Oxford: Oxford University Press.

    Google Scholar 

  • Hoesli, M. & Serrano, C. (2007). Securitized real estate and its link with financial assets and real estate: An international analysis. Journal of Real Estate Literature, 15(1), 59–84.

    Google Scholar 

  • Hosking, J. R. M. (1981). Fractional differencing. Biometrika, 68(1), 165–176.

    Article  Google Scholar 

  • Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12(2/3), 231–254.

    Article  Google Scholar 

  • Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59(6), 1551–1580.

    Article  Google Scholar 

  • Karolyi, G. A. & Sanders, A. B. (1998). The variation of economic risk premiums in real estate returns. Journal of Real Estate Finance and Economics, 17(3), 245–262.

    Article  Google Scholar 

  • Keim, D. B. & Stambaugh, R. F. (1986). Predicting returns in the stock and bond markets. Journal of Financial Economics, 17(2), 357–390.

    Article  Google Scholar 

  • Laopodis, N. T. (2006). Dynamic interactions among the stock market, federal funds rate, inflation, and economic activity. Financial Review, 41(4), 513–545.

    Article  Google Scholar 

  • Ling, D. C. & Naranjo, A. (1997). Economic risk factors and commercial real estate returns. Journal of Real Estate Finance and Economics, 15(3), 283–308.

    Google Scholar 

  • Ling, D. C. & Naranjo, A. (1999). The integration of commercial real estate markets and stock markets. Real Estate Economics, 27(3), 483–515.

    Article  Google Scholar 

  • Liow, K. H. & Webb, J. R. (2009). Common factors in international securitized real estate markets. Review of Financial Economics, 18(2), 80–89.

    Article  Google Scholar 

  • Liow, K. H. & Yang, H. (2005). Long-term co-memories and short-run adjustment: Securitized real estate and stock markets. Journal of Real Estate Finance and Economics, 31(3), 283–300.

    Article  Google Scholar 

  • Liu, C. H. & Mei, J. (1992). The predictability of returns on equity REITs and their co-movement with other assets. Journal of Real Estate Finance and Economics, 5(4), 401–418.

    Article  Google Scholar 

  • McCue, T. E. & Kling, J. L. (1994). Real estate returns and the macroeconomy: Some empirical evidence from real estate investment trust data, 1972–1991. Journal of Real Estate Research, 9(3), 277–287.

    Google Scholar 

  • Mei, J. & Lee, A. (1994). Is there a real estate factor premium? The Journal of Real Estate Finance and Economics, 9(2), 113–126.

    Article  Google Scholar 

  • Mei, J. & Liu, C. H. (1994). The predictability of real estate returns and market timing. Journal of Real Estate Finance and Economics, 8(2), 115–135.

    Article  Google Scholar 

  • Payne, J. E. (2003). Shocks to macroeconomic state variables and the risk premium of REITs. Applied Economics Letters, 10(11), 671–677.

    Article  Google Scholar 

  • Peterson, J. D. & Hsieh, C. H. (1997). Do common risk factors in the returns on stocks and bonds explain returns on REITs? Real Estate Economics, 25(2), 321–345.

    Article  Google Scholar 

  • Poon, S. & Taylor, S. J. (1991). Macroeconomic factors and the UK stock market. Journal of Business Finance and Accounting, 18(5), 619–636.

    Article  Google Scholar 

  • Priestley, R. (1996). The arbitrage pricing theory, macroeconomic and financial factors, and expectations generating processes. Journal of Banking and Finance, 20(5), 869–890.

    Article  Google Scholar 

  • Sephton, P. S. (2002). Fractional cointegration: Monte Carlo estimates of critical values, with an application. Applied Financial Economics, 12(5), 331–335.

    Article  Google Scholar 

  • Serrano, C. & Hoesli, M. (2007). Forecasting EREIT returns. Journal of Real Estate Portfolio Management, 13(4), 293–309.

    Google Scholar 

  • Wilson, P. J. & Okunev, J. (1999). Long-term dependencies and long run non-periodic co-cycles: Real estate and stock markets. Journal of Real Estate Research, 18(2), 257–278.

    Google Scholar 

  • Wongbangpo, P. & Sharma, S. C. (2002). Stock market and macroeconomic fundamental dynamic interactions: ASEAN-5 countries. Journal of Asian Economics, 13(1), 27–51.

    Article  Google Scholar 

  • Yao, J., Gao, J., & Alles, L. (2005). Dynamic investigation into the predictability of Australian industrial stock returns: Using financial and economic information. Pacific-Basin Finance Journal, 13(2), 225–245.

    Article  Google Scholar 

Download references

Acknowledgements

We would like to thank the participants of the ARES 2009 meeting in Monterey, CA and of the ERES 2009 conference in Stockholm (Sweden) for their comments. An anonymous reviewer provided very helpful insights. The usual disclaimer applies.

Author information

Authors and Affiliations

  1. University of Geneva (HEC and GFRI), 40 boulevard du Pont-d’Arve, 1211, Geneva 4, Switzerland

    Camilo Serrano

  2. University of Geneva (HEC, GFRI and SFI), 40 boulevard du Pont-d’Arve, 1211, Geneva 4, Switzerland

    Martin Hoesli

  3. University of Aberdeen (Business School), Edward Wright Building, Aberdeen AB24 3QY, Aberdeen, Scotland, UK

    Martin Hoesli

  4. Bordeaux Ecole de Management, 33405, Talence Cedex, France

    Martin Hoesli

Authors
  1. Camilo Serrano
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Martin Hoesli
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Martin Hoesli.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Serrano, C., Hoesli, M. Fractional Cointegration Analysis of Securitized Real Estate. J Real Estate Finan Econ 44, 319–338 (2012). https://doi.org/10.1007/s11146-009-9231-x

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11146-009-9231-x

Keywords

JEL Classification

Search

Navigation