Abstract
The aim of this paper is to investigate the contagion across real estate markets of four countries: Hong Kong, China, U.S. and U.K., during the financial tsunami in 2008. We use the Forbes-Rigobon test, the coskewness test and the cokurtosis test. We propose a new cokurtosis test constructed by extending the method of constructing the coskewness test to further higher order moments. It can show additional channels of contagion that other tests fail to show, and hence can provide more information on the direction of contagion, and reflect a more complete picture of the contagion pattern. The coskewness and cokurtosis tests show that contagion exists between the four countries, and the contagion effect is stronger between Hong Kong and China, and between U.S. and U.K. This provides clues for investors on how to diversify their investment to reduce their risk. This paper bridges the gap that previous works on contagion across real estate markets give mixed results, and gives a first insight into the contagion pattern of global real estate markets during the financial tsunami.
Highlights
In investment science, it is commonly known that diversification reduces risk
We can see that all entries in the table are smaller than the 5% critical value of 1.645, showing that there is no significant evidence of contagion from any country to others at 5% significance level
4) The coskewness and cokurtosis tests show that the contagion effect between Hong Kong and China-DS Real Estate (China), and between U.S and U.K., is greater than that between Hong Kong/China and U.S./U.K
Summary
It is commonly known that diversification reduces risk. Investors often invest in different types of asset in different countries in order to diversify their risk. During a financial crisis, correlation of a type of asset market between two countries usually increases, i.e. they either move up together or, more commonly, move down together. Even correlation between different types of asset markets may increase, too. The World Bank Group (2011) gives three definitions of contagion: Broad definition: contagion is the crosscountry transmission of shocks or the general cross-country spillover effects
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