An international analysis of REITs and stock portfolio management based on dynamic conditional correlation models

Abstract

This paper analyzes the volatility spillovers and asymmetry between REITs and stock prices for nine countries (Australia, Belgium, Germany, Italy, Japan, The Netherlands, Singapore, the United Kingdom, and the United States) using eight different multivariate GARCH models. We also analyze the optimal weights, hedging effectiveness, and hedge ratios for REIT-stock portfolio holdings with respect to the results. The empirical results indicate that dynamic conditional correlation (DCC) models provide a better fit than the constant conditional correlation models. The DCC with volatility spillovers and asymmetry (DCC-SA) model provides a better fit than the other multivariate GARCH models. The DCC-SA model also provides the best hedging effectiveness for all pairs of REIT-stock assets. More importantly, this result holds for all cases and for all models that we consider, which means that by taking spillover and asymmetry into consideration, hedging effectiveness can be vastly improved.