Transcription
Munich Personal RePEc ArchiveMultivariate Modeling of Daily REITVolatilityCotter, John and Stevenson, Simon2005Online at https://mpra.ub.uni-muenchen.de/3524/MPRA Paper No. 3524, posted 12 Jun 2007 UTC
Multivariate Modeling of Daily REIT Volatility*John Cotter, University College Dublin†&Simon Stevenson, Cass Business School, City University andUniversity College Dublin‡†Centre for Financial Markets, Department of Banking & Finance, University College Dublin,Blackrock, County Dublin, Ireland, Tel: 353-1-7168900, Fax: 353-1-2835482,E-Mail: john.cotter@ucd.ieReal Estate Finance & Investment Group, Faculty of Finance, Cass Business School, CityUniversity, 106 Bunhill Row, London, EC1Y 8TZ, UK.Centre for Real Estate Research, Smurfit School of Business, University College Dublin, Blackrock,County Dublin, Ireland, Tel: 353-1-7168848, Fax: 353-1-2835482,‡E-Mail: simon.stevenson@ucd.ieThe authors would like to acknowledge the comments from participants at the Second Annual Hong KongSingapore International Real Estate Research Symposium, in particular our discussant Shaun Bond, and toseminar participants at the Department of Finance, Goethe University, Frankfurt, Germany.*1
Multivariate Modeling of Daily REIT VolatilityAbstractThis paper examines volatility in REITs using a multivariate GARCH based model. The Multivariate VARGARCH technique documents the return and volatility linkages between REIT sub-sectors and alsoexamines the influence of other US equity series. The motivation is for investors to incorporate time-varyngvolatility and correlations in their portfolio selection. The results illustrate the differences in results whenhigher frequency daily data is tested in comparison to the monthly data that has been commonly used in theexisting literature. The linkages both within the REIT sector and between REITs and related sectors such asvalue stocks are weaker than commonly found in monthly studies. The broad market would appear to bemore influential in the daily case.2
Multivariate Modeling of Daily REIT Volatility1. IntroductionThis paper examines volatility in Equity REITs using a multivariate GARCH based model. The MultivariateVAR-GARCH technique documents the return and volatility linkages between REIT sub-sectors and alsoexamines the influence of other US equity series. The motivation is for investors to incorporate time-varyngvolatility and correlations in their portfolio selection. As Lee & Stevenson (2004) note, REITs to some extentprovide a hybrid investment form, standing between equities and the fixed-income sector. In addition, theasset maintains strong links with the direct private real estate market1. These interlinkages provide the assetwith unique characteristics. The literature that has examined the characteristics of REITs has largelyconcentrated upon the links with either the private market or mainstream equities. In addition, the literaturehas primarily been concerned with linkages in the return series’ involved. This paper aims to extend thecurrent literature by examining some of the key relationships in relation to volatility in the REIT sector. Whilea number of papers have examined interlinkages in volatility (Devaney, 2001, Stevenson, 2002 and Cotter &Stevenson, 2004), they have utilized univariate models whereas this paper extends the analysis of volatilitydynamics by using a multivariate GARCH framework. This paper uses the BEKK process (Engle & Kroner,1995) that isolates the bivariate volatility linkages for each REIT sub-sector. The advantage of the use of amultivariate framework is that not only does such an approach provide an analysis of volatility and theaccompanying interlinkages between the assets concerned, but it also allows an estimation of the timevarying covariance’s and correlations. This allows an investor to incorporate time-varying volatility andcorrelations in their portfolio selection and this paper explores their properties. Increased (decreased)correlation imply lower (higher) diversification ef
Multivariate Modeling of Daily REIT Volatility 1. Introduction This paper examines volatility in Equity REITs using a multivariate GARCH based model. The Multivariate VAR-GARCH technique documents the return and volatility linkages between REIT sub-sectors and also examines the influence of other US equity series.
