Testing the Predictability and Efficiency of Securitized Real Estate Markets

39 Pages Posted: 30 Oct 2009 Last revised: 29 May 2013

See all articles by Felix Schindler

Felix Schindler

Steinbeis University Berlin - Center for Real Estate Studies; ZEW – Leibniz Centre for European Economic Research - International Finance and Financial Management

Nico B. Rottke

European Business School (EBS) Wiesbaden - Department Finance, Accounting & Real Estate

Roland Füss

University of St. Gallen - School of Finance

Date Written: 2009

Abstract

Since the early 1970s and the seminal papers of Fama (1965, 1970), the efficient market hypothesis and its validity for several asset markets have been the topic of an uncountable number of publications in finance. The efficient market hypothesis deals with the question whether stock prices fully reflect all information available at a specific point in time. Weakform tests of the efficient market hypothesis focus on the information set of historical prices or return series. Today, there is abundant empirical evidence that stock markets are efficient, at least in its weak form. This means that investors are not able to earn excess returns compared to a buyandhold strategy by developing and using trading strategies. In contrast, the validity of the efficient market hypothesis is analyzed in less detail for international securitized real estate stock markets, and the few studies that exist focus mainly on the US-market. Thus, this paper examines the behavior of securitized real estate returns for 14 countries over the period from January 1990 to December 2006. The parametric test results indicate that the random walk hypothesis is rejected for several markets. However, since the rejection of the random walk hypothesis does not necessarily imply market inefficiency, a non-parametric technique to test for market efficiency is also conducted. Additionally, the practical relevance of rejecting the random walk hypothesis is tested by implementing trading strategies based on moving averages. Empirical evidence shows that the return generating process of the major securitized real estate markets differs significantly from the theoretical model of a random walk. The empirical findings of return predictability suggest that investors are likely to earn excess returns by using past information in most of the public real estate markets. Trading strategies based on moving averages allowing them to earn risk-adjusted excess returns are compared to a buy-and-hold strategy.

Keywords: securitized real estate, weak-form market efficiency, random walk hypothesis, variance ratio tests, runs test, trading strategies

JEL Classification: G12, G14, G15

Suggested Citation

Schindler, Felix and Rottke, Nico B. and Füss, Roland, Testing the Predictability and Efficiency of Securitized Real Estate Markets (2009). Journal of Real Estate Portfolio Management, Vol. 16, No. 2, pp. 159-179, 2010; ZEW - Centre for European Economic Research Discussion Paper No. 09-054. Available at SSRN: https://ssrn.com/abstract=1495744 or http://dx.doi.org/10.2139/ssrn.1495744

Felix Schindler (Contact Author)

Steinbeis University Berlin - Center for Real Estate Studies ( email )

Berlin
Germany

ZEW – Leibniz Centre for European Economic Research - International Finance and Financial Management ( email )

Postfach 103443
Mannheim, D-68034
Germany

Nico B. Rottke

European Business School (EBS) Wiesbaden - Department Finance, Accounting & Real Estate ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany
0611-36 018 931 (Phone)
0611-36 018 902 (Fax)

HOME PAGE: http://www.rem-institute.org

Roland Füss

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland
+41 (0)71 224 70 42 (Phone)
+41 (0)71 224 70 88 (Fax)

HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx

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