Volatility Persistence in Equity REIT Market
21 Pages Posted: 31 Dec 2007 Last revised: 31 Jan 2013
Date Written: March 7, 2012
Extreme shocks if occur will have significant and permanent impact on the risk premiums of the stock markets. Modeling these events in a conditional variance framework assuming that the stock market will mean-revert in a short time could produce spurious results. Using the Markov-switching autoregressive conditional heteroskedasticity (MS-GARCH) model to filter out the high volatility states from the low and medium volatility states, we found that the volatility persistence (“large news”) increases the returns of the equity real estate investment trust (EREIT). However, when the volatility persistence is interacted with negative shocks, it cause the EREIT returns to decline. The negative volatility persistence effects fit the story of inter-temporal asset substitution, which explain why risk-averse REIT investors substitute risky REIT assets by risk-less assets in periods of prolong negative shocks.
Keywords: Asymmetric Beta, Market Condition, SWARCH, Market Volatility
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