Real-Estate Risk Effects on Financial Institutions' Stock Return Distribution: A Bivariate GARCH Analysis

Posted: 11 Oct 2009

See all articles by Elyas Elyasiani

Elyas Elyasiani

Temple University - Department of Finance

Iqbal Mansur

Widener University - School of Business Administration

Jill Wetmore

Saginaw Valley State University - Finance

Date Written: September 30, 2009

Abstract

This paper examines two relationships using the bivariate GARCH methodology. First, the relationship between equity returns of commercial banks, Savings and Loans (S&Ls) and life insurance companies (LICs), and those of the real-estate investment trusts (REITs), a proxy for the real-estate sector performance. Second, the relationship between conditional volatilities of the stock returns of these financial intermediaries (FIs) and that of REITs. The former relationship allows the spillover of returns between the real-estate and the financial intermediation sector to be analyzed. The latter allows an investigation of the prevalence, direction and strength of inter-sectoral risk transmission to be carried out. Several interesting results are obtained. First, the equity returns of the FIs considered follow a GARCH process and should be modeled accordingly. Second, as found in the literature, returns on REITs should be modeled using the Fama-French multiple factor model. However, this model has to be extended to incorporate a GARCH error structure. Third, all FI returns considered are highly sensitive to REIT returns and the effects are both statistically and economically significant. This is an indication that shocks to REITs returns spillover to the former markets. Fourth, spillover of increased volatility in the real-estate sector to S&Ls and LICs is significant but not to commercial banks.

Keywords: financial institutions, real-estate, REITs, bivariate GARCH

Suggested Citation

Elyasiani, Elyas and Mansur, Iqbal and Wetmore, Jill, Real-Estate Risk Effects on Financial Institutions' Stock Return Distribution: A Bivariate GARCH Analysis (September 30, 2009). Journal of Real Estate Finance and Economics, Vol. 40, No. 1, 2010. Available at SSRN: https://ssrn.com/abstract=1480832

Elyas Elyasiani (Contact Author)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-5881 (Phone)
215-204-5698 (Fax)

Iqbal Mansur

Widener University - School of Business Administration ( email )

3800 Vartan Way
PO Box 69381
Harrisburg, PA 17106-9381
United States

Jill Wetmore

Saginaw Valley State University - Finance ( email )

7400 Bay Road
University Center, MI 48710-0001
United States

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