Correlation and Volatility Dynamics in REIT Returns: Performance and Portfolio Considerations

Posted: 12 Apr 2010

See all articles by Peng Fei

Peng Fei

University of Southern California

Letian Ding

University of Southern California

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Date Written: March 30, 2010

Abstract

We examine the dynamics in correlations and volatility of REITs, stock and direct real estate returns using the monthly data from Jan 1987 to May 2008. To explore asymmetries in conditional correlation, the multivariate asymmetric dynamic diagonal conditional correlation (AD‐DCC) GARCH specification is utilized in this paper. We document that the time‐varying conditional correlations can be explained by macroeconomic variables such as the term and credit spreads, inflation and the unemployment rate. We also find strong relationship between correlations and REITs returns, while those patterns are distinguishable for different types of REITs.

Interestingly, when the correlation between REITs and S&P are the lowest, the future performance of REITs is the best. For equity REITs, there exists a robust relationship between correlations and future returns: the higher (lower) correlation between equity REIT and direct real estate is, the higher (lower) the future returns of equity REIT. Ourresults also have significant economic implications regarding the time-dependent diversification benefits of REITs in a mixed-assets portfolio and the unique risk and return characteristics of REITs.

Keywords: Dynamic Conditional Correlation, REIT returns, Real Estate, Diversification

JEL Classification: G11, G15

Suggested Citation

Fei, Peng and Ding, Letian and Deng, Yongheng, Correlation and Volatility Dynamics in REIT Returns: Performance and Portfolio Considerations (March 30, 2010). Available at SSRN: https://ssrn.com/abstract=1581243

Peng Fei

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Letian Ding

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Yongheng Deng (Contact Author)

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://https://bus.wisc.edu/faculty/yongheng-deng

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