Abstract
“Tail dependence” characterizes the cross market linkages during stressful times. Analyzing tail dependence is of primary interest to portfolio managers who systematically monitor the co-movements of asset markets. However, the relevant literature on real estate securities markets is very thin. Our study extends the literature by using the flexible symmetrized Joe-Clayton (SJC) copula to estimate the tail dependences for six major global markets (U.S., U.K., Japan, Australia, Hong Kong, and Singapore). In implementing the SJC copula, we model the marginal distributions of returns through a semi-parametric method which has never been applied to real estate returns. Our major findings suggest that international markets display different strength and dynamics of tail dependence. We extensively discuss the implications of our findings for financial practices such as portfolio tail diversifications, portfolio selections, portfolio risk management and hedging strategies. Our study also demonstrates that the widely used linear correlation is an inadequate measure of market linkages, especially during periods of crisis.
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Notes
The degree of freedom we used is 10. Though an arbitrary number, experimenting with other numbers leads to similar plots.
To preserve space, the classification plot based on τU is not presented but it is available from us upon request.
For instance, in February 2007 the Chicago Board of Trade launched its new futures contract based on the Dow Jones U.S. Real Estate Index (DJUSRE). As of March 31, 2007, the DJUSRE Index included 91 constituents, of which 85 were REITs. The DJUSRE Index futures contract trades electronically 6 days a week, and has a value equal to 100 multiplied by the value of the DJUSRE.
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Acknowledgements
We thank the Editor, an anonymous referee, and Paul Anglin for valuable comments and suggestions. We gratefully acknowledge the financial supports from University of Guelph and University of Alberta. All errors are our own.
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Zhou, J., Gao, Y. Tail Dependence in International Real Estate Securities Markets. J Real Estate Finan Econ 45, 128–151 (2012). https://doi.org/10.1007/s11146-010-9249-0
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DOI: https://doi.org/10.1007/s11146-010-9249-0