Real Estate Return Volatilty and Systematic Risk: Evidence from International Markets

Abstract

This study empirically examines the dynamics of conditional returns, volatility and systematic risk in ten developing and developed real estate markets and two world market indexes (i.e. world real estate and world stock). We find clustering, predictability, strong persistence and asymmetry in country-specific and global market conditional volatility. Moreover, developing real estate markets display higher conditional volatility and persistence than developed markets. The world real estate market volatility has a statistically significant positive impact on time-varying real estate market betas for developing real estate markets of Asia-Pacific, Hong Kong, Singapore and Malaysia, and a statistically significant negative impact on systematic risk for mature real estate markets of Europe and the UK. Additionally, the extra country-specific market volatility and global market volatility during the Asian financial crisis period seem to impose a larger size influence than the volatility during total period in some markets. Based on comparisons of in-sample forecast errors, our findings appear to favor time-varying real estate betas relative to a world real estate index over a world stock index. Our findings have significant implications for understanding real estate market integration and global capital markets.