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Article
Publication date: 1 February 2013

George Milunovich and Stefan Trück

The purpose of this paper is to investigate contagion between real estate investment trusts (REITs) within and across three geographical regions: North America, Europe and…

Abstract

Purpose

The purpose of this paper is to investigate contagion between real estate investment trusts (REITs) within and across three geographical regions: North America, Europe and Asia‐Pacific. The paper also examines excess comovement between the considered national REIT markets on the one hand, and broad equity indices on the other. In particular, the authors are interested in contagion between the considered markets during the 2007‐2009 GFC period in comparison to the entire 2004‐2011 sample period.

Design/methodology/approach

Using an international factor pricing framework similar to Bekaert, Harvey and Ng, the paper defines contagion as excess comovement between two financial markets, after removing the effects of the underlying economic fundamentals, i.e. risk factors, and time‐changing volatility. Controlling for economic factors is important for distinguishing between pure contagion and information spillovers, which may transmit through existing economic channels. The authors then analyse excess correlations between the derived standardized residuals, for REITS and equity markets in order to investigate excess comovement between the indices during the whole sample and GFC period.

Findings

The paper finds no evidence of excess comovement between the considered REIT and equity indices during non‐crisis sample intervals. However, the paper finds contagion between several national REITs and regional or global equity markets during the GFC period. The paper reports statistically significant excess correlations between national REITs and regional and world real estate markets during the entire sample period, while there is only limited evidence to suggest that the correlation amongst REIT markets has increased during the GFC period. The paper concludes that a similar degree of dependence persisted among national REIT markets over the crisis and non‐crisis sample periods for most markets.

Originality/value

Despite the ongoing debate on contagion in financial markets, there is only a small body of literature investigating contagion specifically for property or real estate markets. This is even more surprising, since the GFC originated from a subprime mortgage crisis and was, therefore, heavily related to real estate. The paper extends the literature by testing for contagion between REITs considering eleven national markets across three geographical regions. In contrast, the existing literature is typically constrained to a significantly smaller number of markets. The paper also explicitly takes into account the impact of the recent GFC, and tests for contagion over this period.

Details

Journal of Property Investment & Finance, vol. 31 no. 1
Type: Research Article
ISSN: 1463-578X

Keywords

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Article
Publication date: 3 August 2012

Jing Liu, Geoffrey Loudon and George Milunovich

The purpose of this paper is to study correlations between the national real estate investment trusts (REIT) markets in the USA and the four Asia‐Pacific countries of…

Abstract

Purpose

The purpose of this paper is to study correlations between the national real estate investment trusts (REIT) markets in the USA and the four Asia‐Pacific countries of Australia, Hong Kong, Japan and Singapore, and document the extent to which the time variation present in these correlations can be explained from a set of 11 economic and financial factors. Both US dollar and local currency returns are used.

Design/methodology/approach

Time‐varying correlations are estimated using a DCC‐GARCH model that allows for asymmetries in both the correlations and volatilities. The correlations are then regressed on a set of four economic and seven financial factors, and tests of statistical significance are conducted in order to discriminate between relevant and irrelevant explanatory variables. The authors estimate a fixed‐effects panel regression as well as individual regressions for each dynamic correlation.

Findings

Significant time variation is found in the four REIT correlation series. Panel regressions suggest that REIT correlations rise with increases in the interaction of national inflation rates and with higher global equity market uncertainty. It is also found that REIT correlations fall with increases in the US default risk premium and global equity market volume. Relaxing the structure imposed by the panel data model, individual regressions confirm most of the results, although there are some exceptions. It is also found that there are no substantial differences in the dynamics of the correlation coefficients when switching from the US dollar to local currency denominated returns.

Practical implications

Investors in real estate securities across national markets should take into account information about the credit spread, the volatility and volume of global equity markets, and inflation rates when modeling correlations. These variables may alert the investors to the possibility that, under a set of circumstances, investing in real estate across different markets may not provide the expected diversification benefits. Another implication relates to the impact of currency hedging. It appears that the impact of switching from US dollar to local currency denominated returns does not substantially change the time dynamics of the correlations, or the importance of explanatory variables.

Originality/value

Although considerable progress has been made in modelling time‐varying correlations between various REIT markets, to the authors' knowledge, this is one of the first papers to investigate the underlying causes of the co‐movement, especially between the US and Asia‐Pacific markets. The paper's results will help investors and risk managers make better choices by identifying those factors that have more systematic effects on the change in the REIT correlations, rather than more transient forces.

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Article
Publication date: 2 March 2015

Martin Hinch, Jim Berry, William McGreal and Terry Grissom

The purpose of this paper is to analyse how London Interbank Offered Rate Index (LIBOR) and the spread between LIBOR and the base rate of interest as set by the Bank of…

Abstract

Purpose

The purpose of this paper is to analyse how London Interbank Offered Rate Index (LIBOR) and the spread between LIBOR and the base rate of interest as set by the Bank of England (BoE) influences the variation in house prices in the UK.

Design/methodology/approach

This paper uses monthly data over a long time series, since 1986, to investigate the relationships between house price and LIBOR. Data are drawn from several different sources to include housing, financial and macro-economic variables. The time series is sub-divided into a series of splines based on stages in the economic and property market cycle. Both value-based and percentage change models are developed.

Findings

The results show that BoE base/LIBOR margin variable has a strong positive and significant effect on house price; however, the percentage change model infers a weaker and inverse relationship. The spline analysis re-emphasised the significance of the BoE base/LIBOR margin variable. Where variation between base rates and LIBOR is reduced, a significant positive effect can be observed in the average house price; however, where significant variation exists, the BoE base/LIBOR margin has little effect and LIBOR itself becomes a significant driver.

Research limitations/implications

The results highlight that the predictive qualities of the BoE base/LIBOR margin, as the contribution of this margin to the explanation of house price, exceeds both the base rate and LIBOR variables individually. Also highlighted is the contribution of unemployment to the explanation of house price. In both the value and percentage change models, unemployment is shown as a negative and highly significant contributor.

Originality/value

Previous papers have demonstrated the important linkage between house price and interest rates, the originality in this paper lies in examining the impact of LIBOR and the spreads between LIBOR and base rate as key variables influencing variation in UK house prices.

Details

International Journal of Housing Markets and Analysis, vol. 8 no. 1
Type: Research Article
ISSN: 1753-8270

Keywords

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