Interlinkage Between Reit Stock And Bond Market Finance Essay

Current literatures have produced assorted grounds on the relationship between existent estate and stock market. The difference could be resulted from different sample informations, either beginning or sample period. More significantly, it is recognized that different consequence can be generated utilizing assorted methodological analysiss and attacks.

Modern Portfolio theory

In the 50s, Markowitz ( 1952 ) introduces an of import construct of variegation, Modern portfolio theory. He has proved that investors could cut down hazard of a portfolio or addition greater return for same sum of hazard by diversifying investings. The nonsystematic hazard would be eliminated in the portfolio with sufficiently big figure of stocks.

There are two attack to understand the market integrating: patterning the behavorial features of stock monetary values and existent estate monetary values without respect to the underlying macroeconomic variables 2. finding the cardinal variables which explin motions in stock returns ( see Liu and Mei 1992 1994. )

1. REITs and Underlying Property Values

Pervious research workers have focused on the association between securitized and unsecuritized existent estate markets.

Performance of REIT markets have been regarded as an appropriate placeholder to belongings market return ( Geltner ( 1990 ) and Martin and Cook ( 1991 ) )


Most early surveies had suggested that REITs and direct existent estate are non related ( e.g. , Gyourko and Linneman, 1988 ; Scott, 1990 ; Ross and Zisler, 1991 ) .

Both documents by Seck ( 1996 ) and Seiler, Webb and Myer ( 1999 ; 2001 ) have significantly different statistical belongingss of REIT and unsecuritized existent estate returns. Hence, they argue that REITs and unsecuritized existent estate should non be regarded as the same investing.


In footings of the relationship between REITs and direct belongings markets, extended surveies have analyzed the linkage between REITs and appraisal-based commercial existent estate indices in the US. Giliberto ( 1990 ) suggests a common existent estate factor of both markets, which indicates a cardinal nexus between two markets. By analyzing the possible lead-lag relationship between direct belongings and REITs, Gyourko and Keim ( 1992 ) show that the lagged values of REITs return are stronger forecasters of direct belongings market returns. It is believed that stock market-based REITs informations provide valuable information on altering existent estate market basicss. The findings of their documents are supported by several following surveies ( Myer and Webb 1993 ; Mei and Lee 1994 ; Campeau 1994 ; Barkham & A ; Geltner 1995 ) utilizing Granger causality trial ( 1969 ) .

Myer and Webb ( 1993 ) conclude that EREITs Granger caused the returns of unsecuritized existent estate market. Campeau ( 1994 ) besides provides groundss of the long-term integrating relationship between private and public markets. Along the same line, Barkham and Geltner ( 1995 ) have suggested a slowdown in unsecuritized existent estate market of more than a twelvemonth. They province that the existent estate basicss is reflected more quickly in REIT portion monetary values with an efficient public market than informationally in efficient unsecuritized existent estate market. Ziering ( 1997 ) Similar empirical grounds has besides been reported by He ( 2000 ) , who have found a cointegration between REITs and house monetary values. It indicates the being of a strong co-movements and long-run equilibrium relationship between two assets. The consequences have been farther confirmed by Glascock, Lu and So ( 2000 ) and Nishigaki ( 2007 ) . The groundss displayed the With regard to the dynamic relationship between two assets, two surveies by Clayton and MacKinnon ( 2001 ; 2003 ) happen a important addition in the sensitiveness of REITs returns to direct existent estate market public presentation. ( can extendaˆ¦ )


Most researches have provided empirical grounds of the cardinal nexus between REITs and implicit in existent estate plus. The consequence reflect the mature REIT market, which is attributed to market growing, efficient information flows, enlargement of sophisticated analyst and investors ( Clayton and Mackinnon 2003 ) .

2. Diversification benefits of REITs ( have found assorted grounds. )

The interrelatedness between REITs and other fiscal markets has been of great involvement in research. There are several attacks normally adopted by research workers. Integration attack is normally used associated with the correlativity or cointegration analysis.

Correlation analysis for REITs and Stock market

Nathan birnbaums and Epley ( 1982 ) suggest that REITs offer the investors good variegation benefits. An of import paper by Kuhle ( 1987 ) has proved that including EREITs in equity-portfolio hazard provide greater variegation benefit than common stocks and MREITs. His survey has significantly triggered many following researches about REITs. The variegation potency of REITs is supported by Giliberto ( 1993 ) , who that the returns of equity REITs and the S & A ; P 500 Index are extremely correlated Giliberto ( 1993 ) used market informations on REITs and the S & A ; P500 is about uncorrelated with the S & A ; P500 Index and more extremely correlated with existent estate indices, and examines the variegation potency of this index.

However, Mull and Soenen ( 1997 ) happen a strong positive correlativity between outputs of REITs and stock markets. The consequences besides show that REITs present as a good investing vehicle during 1990 and 1994, whereas it is non the instance during 1985 and 1990. It is concluded that variegation potency for REITs is clip dependent.

By making several conjectural portfolios, Liang and McIntosh ( 1999 ) have presented some expressions for ciphering and dissecting the variegation benefits of adding a specific existent estate plus to a portfolio.

Chandrashekaran ( 1999 ) constructs a REITs index and paperss the variegation benefit utilizing REIT on the grounds of a decrease in portfolio ‘s return discrepancy.

High correlativity ( Integrated )

In the earlier clip, legion of surveies ( Ross and Zisler 1987a, 1987 B, 1991 ; Mengden and Hartzell 1986 ; Ennis and Burik 1991 ; Gyourko and Keim 1992 ) describe the findings of high correlativity between REITs and stock market.

Mayo ( 1998 ) and Capozza and Seguin ( 1999 ) . Paladino and Mayo ( 1998 ) analyze the standard divergence and correlativity coefficients utilizing the information of appraisal-based NCREIF and NAREIT Index. These documents have rejected the variegation benefits from puting REITs based on the grounds of high correlativity between REITs returns and stock market returns.

Mueller, Pauller and Morrill ( 1994 ) reported that REITs have strong positive correlativities with small-cap stocks and the S & A ; P 500 index, although a weak positive correlativity with bonds.

Lizieri and Satchell ( 1997 ) describe the determination of strong contemporary correlativity between return on securitized belongings and general equity market in United Kingdom.

3. Performance of REITs

3.1 Hazard and Return ( compare existent estate indices among states )

1.REITs VS stock

Jensen index ( look into historical public presentation of REIT! ! )

REITs outperform Stock market

As early in 1976, Smith and Shilman ( 1976 ) have examined the public presentation by comparing 16 subsister REITs with S & A ; P index on a quarterly footing. Given the consequence of Jensen index, means and betas, they conclude that REITs present a better public presentation than S & A ; P during 1963 and 1973. Their findings are supported by Sagalyn ( 1990 ) who estimates the Jensen index of quarterly returns on 20 subsister REITs over the undermentioned periods from 1973 through 1987.

Liu and Mei ( 1992 ) support those old documents that EREITs have outperformed both the big cap and little cap stock, but non bonds.

Chen, Heish and Jordan ( 1997 )

REITs underperform Stock market

However, other research workers have found contradict groundss even by using the same Jensen step of public presentation. Goebel and Kim ( 1989 )

Dun no what method they used

Chan, Hendershott, and Sanders ( 1990 ) , Glascock ( 1991 ) , and Peterson and Hsieh ( 1997 ) find that REITs do non expose higher risk-adjusted returns with regard to stocks. On an international footing, this consequence is confirmed by Ling and Naranjo ( 2002 ) .

-Han and Liang ( 1995 ) examined the public presentation of REIT during 1970 to 1993 by utilizing Jensen index step. They suggest the variegation benefits by including REITs in a mix-asset portfolio. Besides, they have found a similar characteristic of REITs public presentation to a portfolio composed by ‘three-month Treasury measures and a stock market portfolio ” .

Other methodological analysis

As stated in the surveies by Chan et Al ( 1998 ) , they show that there is no important different between the public presentation of REITs and stock market.

Wang et al, 1995 argue that REITs perform worse than general stock market.

Hudson-Wilson ( 2001 ) has reported that REITs market has underperformed bonds and stocks on a risk-return footing during 1987-2000.

Chen and Peiser ( 1999 ) find that REIT stocks underperform both the S & A ; P 500 and the S & A ; P Midcap 400 Index.

Hazard and return features of REITs

Ross and Zistler 1987, 1991

Ennis and Burik 1991

Gyourko and Keim 1992

Real estate market public presentation across states

Hu and Mei ( 1999 ) have compared the features of historical public presentation of belongings indices in nine emerging states. The statistical consequence study that those belongings markets do non supply extra returns to US investors, although there are low correlativity with US indices. It besides report the high volatilities and low rating degrees in these emerging belongings markets.

In the study by Liow and Sim ( ) , Asiatic existent estate markets show a greater volatility without a higher return compared with US REITs and UK existent estate stock market. They besides concludes that high correlativity between Asiatic existent estate and market indices would hold weaken the variegation benefits. These consequences complement the findings of Eichholtz ( 1996 ) .

( risk-return behaviour and variegation potency of 10 Asiatic existent estate stock )

3. Behaviors of REITs

Using other fiscal market as the explanatory varibles

Can non explicate REITs

McIntosh and Liang ( 1998 )

Giliberto ( 1990 )

Hang and Liang ( 1995 )

Using a different attack from old surveies, Clayton and MacKinnon ‘s ( 2003 ) inquiry whether the variableness of REITs market return can be explained by stock, bond and existent estate market public presentation. They decompose the discrepancy of REIT return into constituents related to stock, bond and related belongings indices. The consequence show

4.Relationship between stock and REITs


Ghosh, Miles and Sirmans ( 1996 ) papers a cut downing correlativity between REITs and overall market.

Ziering 1997

McIntosh and Liang ( 1998 )

This paper distinguishes bookmans ‘ findings into two classs. In footings of market cleavage theories,

Cointegration analysis

Cointegrated markets offer limited variegation additions ( Eichholtz ( 1996 ) and Tarber ( 1998 ) ) . Cointegration is robust to intertemporal correlativity instability.

The benefits from including belongings in assorted plus portfolios are examined in a Modern Portfolio Theory ( MPT ) framework. ? ?

integrated with REITs, segmented with the commercial existent estate market

As early in 1990, Liu, Hartzell, Greig, & A ; Grissom ( 1990 ) , foremost use single-factor CAPM to look into the relationship between EREITs, non-farm commercial existent estate and stock market in US between 1979 and 1986. They find that stock market is integrated with REITs market, whereas they report market cleavage between two markets when utilizing assessment based return. The decision of integrating between securitized belongings market and equity market is shortly confirmed by Miles, Cole and Guikey ( 1990 ) .

. At the same clip, Geltner ( 1990 )


Similarly, Gyourko and Keim ( 1992 ) happen a important explanatory power of S & A ; P 500 index public presentation on the EREIT returns by utilizing arrested development analysis. They believe that the stock market reflects valuable and timely information about altering existent estate basicss ( a/b? ) . At clip same clip, Ambrose, Ancel and Griffiths ( 1992 ) employed a rescaled scope analysis to prove deterministic nonlinear tendencies in the return series. It is found that MREITs and EREITs displayed similar return-generating features as the stock markets. Therefore, they conclude that the existent estate and stock markets are co-integrated.

Multi-factor pricing theoretical account

Numerous researches have tried to explicate the form of REITs market public presentation utilizing multi-factor pricing theoretical account alternatively of individual factor theoretical account, CAPM. Liu and Mei ( 1992 ) argue that multi-factor pricing theoretical account was more efficient in foretelling expected return than CAPM. The consequence of a multifactor latent variable theoretical account with time-varying hazard premiums show that stock and bond market could explicate the fluctuation in the expected returns on existent estate market. In peculiar, they report that the hazard premium of EREITs move closely with little cap stocks. Their findings are farther confirmed by other literatures. Myer and Webb ( 1993 ) have found grounds that the return of REITs behave much more like stocks returns than unsecuritized existent estate returns. The consequence imply that REITs are closely linked to both stock every bit good as direct existent estate market.

Mei and Lee ( 1994 ) employ same theoretical account used in the survey of Liu and Mei to look into the predictability of expected returns on several plus portfolios comprised of EREITs andaˆ¦ Their surveies have failed to turn out any grounds of cleavage between the markets. As a consequence, they claim that existent estate stocks could non diversify hazard of a stock market portfolio. Li and Wang ( 1995 ) back up the old surveies and happen the similar predictability of equity REIT returns and other assets utilizing cointegration trial associated with a two-factor theoretical account including stock and bond markets. The decision of the literature by Li and Wang is supported by several following surveies. Oppenheimer and Grissom ( 1998 ) examine the coherence between REITs, stocks and exchequer debt indices in US utilizing cross-spectral analysis. Stock market is found to dominantly act upon the return REITs over the period from 1989 to 1995. The consequences display a important co-movement between the indices of REITs and stock, but merely few frequences with important coherence in debt.

Another survey by Ling and Naranjo ( 1999 ) further confirm the integrating between US stock and REITs market utilizing non-linear arrested development. ( multifactor plus pricing models.Li wang and Ling naranjo )

Peterson and Hsieh ( 1997 ) use Fama-French theoretical account ( Fama and Gallic 1993 ) to analyse the return of stock, bond and REITs indices informations between 1976-1992. The consequence show that hazard premiums on EREITs are significantly related to three Fama-French factors driving stock indices return, while hazard premiums on MREIT are significantly related to two bond market factors and three stock market factors. ( use MUl )

4.Relationship between stock and REITs

Cointegration methodological analysis

Okunev & A ; Wilson ( 1997 ) find inconsistent consequences utilizing different analysis. US EREITs and stock markets are segmented under the cointegration analysis, whereas they are fractionally integrated under the nonlinear theoretical accounts. It is concluded that REIT and stock markets portion a nonlinear relationship. Specifically, the groundss of slow average reversion of REITs market towards stock market every bit good as a drawn-out divergence between two markets are provided. ( CC )

Similarly, Glascock, Lu and So ( 2000 ) have documented an interconnected relationship between stocks, bonds and REITs markets in US with the application of vector autoregressive theoretical account. However, they has found that REITs behave more like stocks, peculiarly little caps stocks, instead than bonds. They conclude that the benefit of variegation by including REITs in multi-asset portfolio has declined after 1992.

In order to capture the dynamic relationship ( or hunt words in AT? ) , Okunev Wilson and Zurbruegg ( 2000 ) use both additive and nonlinear causality trials in the analysis. Using the information of EREITs and S & A ; P 500 between 1972 and 1998, they show that there exists a non-linear co-integration between existent estate and stock market in US. In peculiar, the consequence displays a strong unidirectional relationship running from the stock market to the REITs market. ( CC )

Swiss market: Cauchie and Hoesli ( 2006 ) integrated with stock and bond

More late, Serrano and Hoesli ( 2009 ) have examined the linkage between securitized markets and three sets of variables antecedently discussed in the documents by Chan, Hendershott and Sanders ( 1990 ) , Liu and Mei ( 1992 ) and Clayton and Mackinnon ( 2003 ) . Signii

Cleavage between REITs and stock

Wilson and Okunev ( 1996 ) and Wilson et Al. ( 1998 ) findings do non back up cointegration between securitised existent estate and stock markets either domestically and internationally. Other surveies ( Newell and Acheampong, 2001, Kishore, 2004, Newell, 2005a ) found that the correlativity between stock market and LPTs in Australia.has declined in recent old ages

Time-varying relationship

The dynamic relationships between REITs and other fiscal market have been surveies by Clayton and MacKinnon ( 2001 ) . Based on the US informations in 1978-1998, the empirical consequences show that the sensitiveness of REITs return to stock market return, peculiarly to the big cap stock, has declined over clip. In add-on, it support a structural alteration in REITs market after 1992. They conclude that the relationships of REITs to other fiscal markets are time-varying in nature.

They result besides support the paper of Goldstein and Nelling ( 1999 ) that EREITs have a lower beta in the bull market and a higher beta in bear market. Chatrath, Liang and McIntosh ( 2000 ) refer to this phenomenon as the ”asymmetric-REIT-beta-puzzle ” .

Non-US states ( include all existent estate market, non merely REITs )

There are besides some documents investigate the linkage of belongings market and other fiscal markets in the non-US states, although there are comparatively less.

For the Swiss market, existent estate financess, similar to REITs in US, are found to be integrated with both stocks and bonds ( Cauchie and Hoesli, 2006 ) .

For the Dutch lodging market, Kakes and End ( 2004 ) find that equity is a determiner of the house monetary values.

Quan and Titman ( 1999 ) examines the linkage between public presentations of stock markets and existent estate markets with the historical information of 17 major states over 14 old ages. The empirical consequences study that the alterations between stock returns and alterations in belongings monetary value in 16 states are non significantly correlated, demuring for Japan. It indicates that, there is no cointegration relationship between existent estate markets and stock markets in foreign states. ( Not certainly in this Class )

Asiatic states

Since the Asiatic REIT market is still in the aˆ¦ there are so much less surveies straight concentrating on the REIT market.

Market cleavage

Ong ( 1995 ) analyzes stocks in the building sector and the existent estate market ( non REITs ) in Singapore and finds that there is no co-integration relationship between these two.

Chang and Lee ( 2000 ) indicate that both in the short-run and long-run, the stock monetary values in Taiwan affect lodging monetary values, but there is a slowdown of one month.

For Hong Kong market, Fu et Al. ( 2001 ) suggest a cleavage relationship between residential belongings market and stock market.

Chang et Al. ( 2005 ) prove the long-run relationship between the existent estate market and the stock market in Taiwan between the 3rd one-fourth in 1986 and the 4th one-fourth in 2001 and happen that there is no cointegration between these two markets. From the hazard variegation positions, these two assets can be placed in the same investing portfolio.


Market integrating

For Singapore, Ong ( 1994 ) paperss the extremely incorporate relationships between stock and existent estate markets.

The short-term relationship of existent estate market and stock market have been surveies by Okunev, Wilson and Zurbruegg ( 2002 ) who report assorted grounds under additive and nonlinear Granger causality trial. They argues that the additive relationship between the markets would go unstable when there was a structural alterations between markets Using the information over 19 old ages from 1980 through 1999 in Australia, they find a additive bi-directional Granger insouciant relationship between public presentations of two markets for the whole period. Refering the impact of structural interruption, they have divided the whole period into three subsamples. In contrast to the consequence utilizing 19 old ages sample, it is found that merely the alterations in stock market monetary value would impact public presentation of existent estate market. Similarly, a strong unidirectional relationship from stock market to belongings market is proved under nonlinear Granger causality trial.

More late, Lee, Shyu, Hsieh and Lee ( 2010 ) look into the relationship between securitized belongings market and stock market utilizing TOPIX existent estate index.


Numerous of surveies have employed multiple plus pricing theoretical account to analyze if the public presentation of stock and bond market could capture the REIT market ‘s monetary value motion.

Karolyi and Sanders ( 1998 ) acknowledges that multiple beta plus pricing theoretical account might non be appropriate