Price Discovery in Real Estate Markets: A Dynamic Analysis

49 Pages Posted: 29 Aug 2010 Last revised: 11 Feb 2011

See all articles by Abdullah Yavas

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: August 26, 2010

Abstract

Although the correlation between the public and private market pricing of real estate has generated considerable research effort, the methods utilized in previous studies have failed to capture the dynamic nature of this correlation. This paper proposes a new statistical method to address this issue. This method, known as the dynamic conditional correlation GARCH model, enables us to study the dynamics of the correlation between the two markets over time and enrich our understanding of the public and private market pricing of real assets. We find that the correlation between NAV returns and REIT returns is dynamic for all REIT types and there is a strong degree of persistence in the series of correlation. Our Granger-causality tests show that price discovery generally takes place in the securitized public market. However, we also find significant variations across property types and individual firms within each type. Our results indicate that constructing an optimal portfolio requires firm level analysis of causality and correlation between REIT returns and NAV returns.

Keywords: price discovery, REIT returns, NAV returns

Suggested Citation

Yavas, Abdullah and Yildirim, Yildiray, Price Discovery in Real Estate Markets: A Dynamic Analysis (August 26, 2010). Journal of Real Estate Finance and Economics, Vol. 42, No. 1, 2011. Available at SSRN: https://ssrn.com/abstract=1666270

Abdullah Yavas (Contact Author)

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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