Spillover Risks in REITs and Other Asset Markets

Posted: 3 Apr 2017

See all articles by Ming-Chu Chiang

Ming-Chu Chiang

Kun Shan University of Technology

Tien Foo Sing

National University of Singapore (NUS) - Department of Real Estate

I. Chun Tsai

Southern Taiwan University of Science and Technology - Department of Finance

Elizabeth Kittle

University of Georgia - C. Herman and Mary Virginia Terry College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 30, 2017

Abstract

Based on Diehold and Yilmaz's (2012) methodology, we estimate three return spillover indices in a four-asset system comprising equity REIT (EREIT), mortgage REIT (MREIT), stock, and bond for the sample period from January 1972 to September 2014. We find that the total return spillover risks account for about one-third of the total return variance, on average, in the four-asset system. When we add commercial real estate (CRE) to the system, but for a shorter sample period from February 1998 to September 2014, we estimate an average total return spillover risk of 28.0%. In an extended Fama-French's five-factor CAPM framework, we find that the net return spillover risks have significant and negative effects on EREIT and MREIT returns, but positive effects on bond return. We infer that during the period of high oil price volatility from 1978 to 1986, bond market, as a net "receiver" of market risks, increased its risk premiums in response to high spillover risks from other market. However, in the post-subprime crisis period, large spillover risks from the stock market, which is a net "transmitter" of risks, decreased EREIT and MREIT returns. We also find that CRE return is not affected by spillover risks from other markets. Institutional investors should thus not neglect spillover risks when constructing asset allocation strategies that include assets other than CRE.

Keywords: Systematic Risk; Total Return Spillovers; Net Return Spillovers; Own Return-Spillovers; Asset Returns; REITs; Stock; Real Estate

JEL Classification: G12

Suggested Citation

Chiang, Ming-Chu and Sing, Tien Foo and Tsai, I. Chun and Kittle, Elizabeth, Spillover Risks in REITs and Other Asset Markets (March 30, 2017). Journal of Real Estate Finance and Economics, Vol. 54, No. 4, 2017. Available at SSRN: https://ssrn.com/abstract=2943566

Ming-Chu Chiang

Kun Shan University of Technology ( email )

949, Da Wan Road
Tainan Hsien 710
Taiwan

Tien Foo Sing

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

I. Chun Tsai

Southern Taiwan University of Science and Technology - Department of Finance ( email )

Nan-Tia St.
Tainan Taiwain 710, Tainan
China

Elizabeth Kittle (Contact Author)

University of Georgia - C. Herman and Mary Virginia Terry College of Business ( email )

Brooks Hall
Athens, GA 30602-6254
United States

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