Fractional Cointegration Analysis of Securitized Real Estate

Abstract:     
This paper uses fractional cointegration analysis to examine whether long-run relations exist between securitized real estate returns and three sets of variables frequently used in the literature as the factors driving securitized real estate returns. That is, we examine whether such relationships are characterized by long memory (long-range dependence), short memory (short-range dependence), mean reversion (no long-run effects) or no mean reversion (no long-run equilibrium). The forecasting implications are also considered. Empirical analyses are conducted using data for the U.S., the U.K., and Australia. We find strong evidence of fractional cointegration between securitized real estate and the three sets of variables. Such relationships are mainly characterized by short memory although long memory is sometimes present. The use of fractional cointegration for forecasting purposes proves particularly useful since the start of the financial crisis.

Keywords: Fractional cointegration, Fractionally integrated error correction model (FIECM), Forecasting, Multifactor models, Securitized real estate, REITs

JEL Classification: G17, G11, C53

Accepted Paper Series