Dynamic Conditional Correlation Analysis in International Real Estate Security Markets

Abstract

In this paper, we examine international correlation and volatility of publicly traded real estate investment trusts (REITs) using daily returns from 2005/12/1 to 2010/5/31. We also study, in comparison, the correlations among equivalent stock markets. Based on a multivariate dynamic conditional correlation (DCC) model which captures the time-varying correlations within the full period, this paper empirically shows that there are lower correlations among the real estate security markets returns than among the stock markets returns. We forecast that variations and structural changes in the correlation structure happened within the sample period of subprime mortgage crises. Applying DCC methodology, our results have motivations concerning the potential integration of international real estate security markets and the possibility of including information on changing correlations and volatilities to set up more optimal portfolios of international real estate securities.