Modelling Price Dynamics in the Hong Kong Property Market

33 Pages Posted: 5 Sep 2007

See all articles by Sherry Zhefang Zhou

Sherry Zhefang Zhou

City University of Hong Kong

Helen X. H. Bao

University of Cambridge - Department of Land Economy

Date Written: September 1, 2007

Abstract

The property market in Hong Kong plays an important role in the political, social and economic life of this vibrant city. Understanding the dynamics of the market is essential to guide government policy making and investment decisions. Using data collected between 1993 and 2006, this study investigates the monthly returns, volatilities and time-varying correlations in the residential, office, and retail property markets in Hong Kong. A vector autoregressive (VAR) model is used to examine the conditional mean, and a multivariate generalized autoregressive conditional heteroscedasticity (MGARCH) model is adopted to analyze the conditional variance. The dynamic conditional correlation (DCC) approach is utilized to specify the MGARCH model. All of the property types show strong auto- and cross-correlations, which indicates that the sectors relate to each other closely. All three sectors have higher volatilities when major political and economic events occur. The findings reveal the possibility of balancing investment portfolios between the three sectors in the Hong Kong property market. However, it is difficult to achieve a well-diversified portfolio only by cross-property investment for the Hong Kong REITs. REIT managers should also consider cross-country diversification to reduce the investment risk. Furthermore, exposure to the residential sector may reduce the chance of investment diversification because of the higher correlation of this sector with the other property sectors.

Keywords: Return, volatility, VAR, MGARCH, dynamic conditional correlation

JEL Classification: C32, R31, R33

Suggested Citation

Zhou, Sherry Zhefang and Bao, Helen X. H., Modelling Price Dynamics in the Hong Kong Property Market (September 1, 2007). Available at SSRN: https://ssrn.com/abstract=1012320 or http://dx.doi.org/10.2139/ssrn.1012320

Sherry Zhefang Zhou (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Helen X. H. Bao

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

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