Research On Dynamic Correlations Of Real Estate Markets And Stock Markets

Investments in private real estate market and securitized real estate market have provided valuable diversification benefits for investors. The correlations among real estate markets and share market are crucial for the risk-return characteristics of those portfolios. Clarifying the dynamic correlations among real estate assets and stocks in the international markets is of significant importance for portfolio managers and market regulators, especially in the context of Chinese depressing private real estate market.In this study, we classified and discriminated the development of different types of GARCH models in the light of their economic implications and mathematical structures. By statistical tests corresponding to our classification, we chose DCC-IGARCH model to examine the correlations among commercial and residential real estate markets, REITs markets and stock markets in Japan and Singapore. For comparison, we than updated analogous studies about U.S. and UK markets with latest data.We have three main findings. First of all, all types of correlations with direct real estate markets went up significantly in 2008 global financial crisis, but the rising was temporary in long horizon and was associated with the origin of the crisis. Second, the correlations between REITs and stock ascended persistently through financial crisis, which implies REITs behave more and more like stocks rather than direct real estate properties, despite the fact that REITs was supposed to reflect the market condition of the latter. Third, from the view of diversification benefits, direct investments in commercial and residential real estate, rather than REITs, are still outstanding for long term investor, like pension fund, in spite of the undeniable influence of the financial tsunami. Furthermore, according to the statistical tests, the return of direct real estate investments has notable long memory effect and negligible leverage effect, while the return of REITs and stocks has insignificant evidence of both two effects.