Abstract
This study empirically tests the contagion effects in stock and real estate investment trust (REIT) markets during the subprime mortgage crisis by using daily stock- and REIT-markets data from the following countries and international bodies: the United States, the European Union, Japan, Hong Kong, Singapore, Australia, and the global REIT market. We found a significant and positive dynamic conditional correlation (DCC) coefficient between stock returns and REIT returns. The results revealed that the REIT markets responded early to market shocks and that the variances were higher in the post-crisis period than in the pre-crisis period. Evidence supporting the contagion effects includes increases in the means of the DCC coefficients during the post-crisis period. The Japanese and Australian REIT markets possess the lowest time-varying downside systematic risks. We also demonstrated that the “DCC E-beta” captures more significant downside linkages between market portfolios and expected REIT returns than does the standard CAPM beta.
Highlights
During the period from March 2007 to 2008, the U.S financial market experienced an unprecedented financial shock, which spread swiftly to other countries in Europe and Asia
The dynamic conditional correlation (DCC) used in conjunction with the GJR-GARCH (1, 1) model is suitable for estimating the conditional correlations between the stock and real estate investment trust (REIT) markets
This study investigates the relationship between the DCC CAPM beta and the expected weekly REIT return for the subsample periods from March 13, 2007 to March 12, 2009
Summary
During the period from March 2007 to 2008, the U.S financial market experienced an unprecedented financial shock, which spread swiftly to other countries in Europe and Asia. The U.S subprime mortgage crisis was a tragic event that can be used by researchers to empirically test for contagion effects in financial markets. Chandrashekaran (1999) calculated the correlation coefficients between the monthly excess returns of the REIT index and the S&P 500 He demonstrated that the correlation dropped from 79% in 1980–1984 to 48% in 1990–1996. That study demonstrated that the daily conditional correlations fluctuated widely, but trended upward during the period from January 1999 to June 2003. None of these studies, tested the contagion effects between the stock market and the REIT market
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