Linkages between Direct and Securitized Real Estate
Turku School of Economics - Department of Economics
University of Geneva - Graduate School of Business (HEC-Geneva); University of Aberdeen - Business School; Swiss Finance Institute
IAZI AG - CIFI SA
June 30, 2009
Swiss Finance Institute Research Paper No. 09-26
22nd Australasian Finance and Banking Conference 2009
Using data for the 1978-2008 period, this study presents evidence for cointegration between securitized (NAREIT) and direct (NCREIF) total return indices. Cointegration between the indices indicates that REITs and direct real estate are substitutable in the portfolio of a long-horizon buy-and-hold investor. Since the real estate indices are not found to be cointegrated with the stock market, REITs and direct real estate are likely to have similar long-term diversification benefits in a stock portfolio. In line with prior expectations, only direct real estate is found to currently adjust towards the cointegrating relation, with NAREIT returns leading NCREIF returns. However, giving support to the often stated argument regarding weaker informational efficiency of the REIT market prior to the 'new REIT era', the results show evidence for the predictability of NAREIT returns during the 1980s. It is also found that at the beginning of the 'new REIT era' a large and long-lasting deviation from the long-run relation between NAREIT and NCREIF emerged. However, there is no evidence of a permanent structural break in the long-run relation since the deviation appears to have been only temporary.
Number of Pages in PDF File: 38
Keywords: cointegration, Vector Error-Correction Models, direct real estate, securitized real estate, REITs, diversification
JEL Classification: G11, G14, C32working papers series
Date posted: July 7, 2009 ; Last revised: August 25, 2009
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