On the Dynamics of International Real-Estate-Investment Trust-Propagation Mechanisms: Evidence from Time-Varying Return and Volatility Connectedness Measures.

Keagile Lesame,David Gabauer,Elie Bouri,Rangan Gupta

doi:10.3390/e23081048

Abstract

In this paper, we investigate the time-varying interconnectedness of international Real Estate Investment Trusts (REITs) markets using daily REIT prices in twelve major REIT countries since the Global Financial Crisis. We construct dynamic total, net total and net pairwise return and volatility connectedness measures to better understand systemic risk and the transmission of shocks across REIT markets. Our findings show that that REIT market interdependence is dynamic and increases significantly during times of heightened uncertainty, including the COVID-19 pandemic. We also find that the US REIT market along with major European REITs are generally sources of shocks to Asian-Pacific REIT markets. Furthermore, US REITs appear to dominate European REITs. These findings highlight that portfolio diversification opportunities decline during times of market uncertainty.

Highlights

The objective of this paper is to study the daily dynamic return and volatility spillover or connectedness in international Real Estate Investment Trusts (REITs) based on a representative sample of major REIT markets (Belgium, United Kingdom, France, Germany, Japan, Netherlands, New Zealand, Canada, Australia, Hong Kong, Singapore, and the United States), with the United States being the only mature REIT market and the rest of the countries in the sample being established markets
The generalized forecast error variance decomposition (GFEVD) is completely invariant of the variable ordering opposed to the orthorgonalized forecast error variance decomposition. (We want to stress that even though we are talking about the spillovers of shocks, we are well aware that this interpretation differs from the macroeconomic literature; with this interpretation we are just following the interpretations Diebold and Yılmaz [20,21,27] to be in line with the connectedness literature.) We have decided to apply the GFEVD approach, as—to the best of our knowledge—no economic theory is developed that determines the structure of sectoral shocks
Our findings show that both returns and volatility spillovers are dynamic and that connectedness increased sharply during times of market distress, indicating reduced diversification benefits during such events

Summary

Introduction

A return shock in one asset market can be transmitted to another asset market. Volatility, which represents uncertainty and risk in financial markets, is investigated to understand the transmission dynamics of volatility shocks, which helps investors manage portfolio risks and market regulators to respond effectively to its consequences. Advances in trading technology, including the rapid flow of information across international financial markets, has further led to higher return and volatility in financial markets (Zhang [1], Boehmer et al [2]). There is a large body of empirical literature studying the transmission of return and volatility shocks across equity markets; evidence on the cross market transfer of these shocks in REIT markets are few

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