Abstract
This study examines the price discovery function and volatility spillovers in australian real estate investment trust (A-REIT) index futures and also investigates the effects of the global fi- nancial crisis (gfc) on these two features. as opposed to the general understanding of the relationship between the cash and the futures markets, the current study finds that the A-REIT cash market led the a-reIt futures market in price discovery and volatility transmission processes before the gfc. However, during the GFC, the two markets interacted bilaterally in terms of information flow, i.e., in- formation flowed in both directions. Furthermore, after the GFC, the futures market followed the cash market again, but less closely. These findings have broad implications for investors in property assets.
Highlights
Recent studies in the real estate markets have highlighted the effectiveness of hedging real estate futures, the links between real estate investment trust (REIT) futures and the underlying REIT market have been largely neglected far
A sharp increase in the trading volume of Australian REIT (A-REIT) futures has been experienced since the global financial crisis (GFC), which might be attributed to increased hedging activities by institutional investors who are attempting to protect the values of their A-REITs (Newell 2010)
The Australian REIT futures market is much smaller than the REIT cash market, and recent studies have found evidence regarding the link between investor structure and the futures price formation process
Summary
Recent studies in the real estate markets have highlighted the effectiveness of hedging real estate futures, the links between real estate investment trust (REIT) futures and the underlying REIT market ( known as the cash/spot market) have been largely neglected far. Our multivariate EC-VAR(1)-BEKK-GARCH-X(1,1) model incorporates the underlying long-term relationships between A-REITs and A-REIT futures in terms of both conditional means and variances, which allows us to examine for the first time both long- and short-term price discovery and volatility spillovers between A-REITs and A-REIT futures. In this respect, our model improves on the traditional GARCH model. This study provides property investors with further insights regarding the links between A-REITs and A-REIT futures both in the long- and short-term time frames and eliminates the influences of common informational factors to present a clearer picture of the interactions between the A-REIT futures and cash markets that are examined.
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