Multiple Regimes and Volatility Transmission in Securitized Real Estate Markets

Abstract

We examine the dynamics and transmission of conditional volatilities with multiple structural changes in return volatility using Bai and Perron (2003)’s methodology, across five major securitized real estate markets as well as employing a multivariate regime-dependent asymmetric dynamic covariance methodology (MRDADC) that allows the conditional matrix to be both time- and state-varying. Our results imply that a multiple-regime time varying asymmetric variance and covariance approach is important in modeling real estate securities valuation and selection and portfolio optimization, and is consistent with popular beliefs that market volatility changes over time. Our MRDADC models detect the presence of significant mean-volatility linkages across the five major securitized real estate markets under different volatility regimes and would have implications for global investor in terms of estimating a dynamic risk-minimizing hedge ratio in international portfolio management.