Abstract
This study first uses the non-linear co-integration with structural breaks by Gregory and Hansen (1996) to examine whether non-linear co-integration exists between real estate investment trusts (REITs) and corresponding stock markets in the United States and Australia. Second, we employ the smooth transition vector-error correction model (STVECM) including the generalized autoregressive conditional heteroskedasticity (GARCH) model to separately explore the adjustment efficiencies of non-linear short-run REIT and corresponding stock return dynamics, as well as respective REIT return dynamics when the long-run disequilibrium occurs. The results show that a structural break co-integration exists between the equity and mortgage REITs and stock markets in the US, between the REITs and stock markets in the Australia and between the REIT markets in both the US and Australia. When there are large positive and negative deviations of STVECM, the adjustment speed of reverting to equilibrium of the S&P 500 index is greater than that of the Mortgage REIT index. However, when there are large positive (negative) deviations of STVECM, the adjustment speed of reverting to equilibrium of the Australian REIT (stock) index is greater, and that of the Australian REIT (US REIT) index is greater. In addition, by using a non-linear Granger causality test by Hiemstra and Jones (1994), we find that credit price effects exist between the US for each type of REIT and stock markets regardless of large positive or negative deviations (or returns) in STVECM (or STVAR). However, there is a feedback effect exists between the REITs and the stock markets in Australia.
Highlights
As of December 2010, the global market capitalization of real estate investment trusts (REITs) has surpassed US$ 800 billion, with nearly 500 fund management units
This study utilized the co-integration test with structural breaks proposed by Gregory and Hansen (1996) in order to test whether non-linear co-integration relationships exist between US REITs and stock indices, between Australian REIT and stock indices and between US REITs and Australian REIT indices
This study used the non-linear Granger causality test mentioned by Hiemstra and Jones (1994) to analyze whether ‘wealth effect’ or ‘credit price effect’ exists in the US and Australian markets
Summary
As of December 2010, the global market capitalization of REITs has surpassed US$ 800 billion, with nearly 500 fund management units. Structural breaks occur in both the intercept and time trends (C/T): The results of the KSS non-linear stationarity test show that all of the REIT indices and corresponding stock price indices in the US, as well as the REIT index and stock price index in Australia are all linear unit roots whose first-order differences are stationary. This confirms that the respective REIT indices and stock price indices are I (1) sequences in such areas. Structural breaks occur in both the intercept and the slope (C/S): Pht =μ1 + μ2 ⋅ Dtτ + α1 ⋅ Pst + α2 ⋅ Pst ⋅ Dtτ + et . (7)
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