The Integration of Securitized Real Estate and Financial Assets

Abstract

Empirical evidence suggests that U.S. REITs are integrated with common stocks, but not with bonds. The design of the real estate security is likely to impact upon results, however, and it would seem important to analyze the topic of integration for another type of real estate security. Swiss real estate funds constitute an ideal candidate for such an examination as their institutional and legal setup differs substantially from that of other countries. We analyze the integration of such funds with both the stock and bond markets using an APT framework. We employ both the Xu (2003) method and an innovative procedure to determine endogenous and exogenous factors, respectively. Integration is assessed by means of two alternative tests. Our results suggest that Swiss real estate funds are more integrated with stocks than with bonds. Further, we show that the degree of integration between real estate and stocks is due to a stock market factor and changes in expected inflation. No integrating factor is found between real estate and bond funds. Finally, it is found that unexpected inflation is a segmenting factor between real estate securities and financial assets.

Keywords: Securitized Real Estate, Statistical APT, Macroeconomic APT, Market Integration, Risk Factors

JEL Classification: G12