Hedging effectiveness of REIT futures

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The hedging effectiveness of real estate investment trust (REIT) futures as a critical issue in response to the global REIT market has been extremely volatile in recent years, however few studies have been placed on this area. This study aims to fill in this gap and examine the hedging effectiveness of Australian and Japanese REIT futures over 2002-2010. Design/methodology/approach -The analysis of this study involves two stages. The first stage is to estimate optimal hedge ratios. A variety of hedging methods is employed, including a traditional hedge, an ordinary least squares (OLS) model and a bivariate GARCH model. Thereafter, the hedging effectiveness of these strategies is assessed individually. Findings -The empirical results show REIT futures are effective hedging instruments in which a risk reduction of 37 per cent-78 per cent (34 per cent-52 per cent) for Australian ( Japanese) REITs is evident. Importantly, the results also reveal that REIT futures outperform other hedging instruments in which a weaker risk reduction is found by stock, interest rate and foreign currency futures contracts. Moreover, the hedging effectiveness of REIT futures is dynamic and varies over time. Practical implications -The findings enable more informed and practical investment decision-making regarding the role of REIT futures in risk management. Originality/value -This paper, as far as the authors are aware, is the first study to offer empirical evidence of the risk-reduction effectiveness of REIT futures. The hedging effectiveness of REIT futures is also compared to other hedging instruments for the first time.

Cross Hedging Effectiveness of Real Estate Securities Exchange Traded Funds

“…Newell and Tan (2004) and Newell (2010) conclude that Australia LPT futures can effectively hedge Australia LPT portfolio returns. Lee and Lee (2012) replicate the above finding for Australia and Japan REITs. They find that Australian and Japanese REIT futures reduced the risk of the respective underlying assets by 37% to 78% and 34% to 52% over the 2002 to 2010 period.…”

Performance evaluation and volatility of Turkey REITs during COVID-19 pandemic

“…Figure 1 presents the volatility clustering of Turkish REITs returns. Lee and Lee (2012) evidenced the presence of volatility clustering through the pattern of returns series on the REITs returns graph. There is significant evidence that the returns are persistently volatile as the sum of the volatility parameters is greater than 1 (α + β >1).…”

Listed real estate futures trading, market efficiency, and direct real estate linkages: International evidence

“…As such, the market efficiency of public real estate in reflecting the underlying private real estate has been raised. An introduction of futures trading, a major financial innovation, on real estate is expected not only to provide another platform to allow speculation and hedging activities (Lee and Lee, 2012), but also offer extra market information that would enhance the market efficiency of its spot market via a reduction of market noise (Antoniou & Holmes, 1995;Bohl et al, 2011). The enhancement of information offers useful economic forecasting and now-casting tools.…”

“…While there is a rich literature that has now examined a variety of issues relating to real estate futures (e.g. Newell, 2010;Lee 2009;Lee & Lee, 2012;Lee et al, 2014;Lee et al, 2016;Clements et al, 2017;Zhou, 2016Zhou, , 2017, there remains much to be explained. No study has fully considered how futures trading has an effect on the interlinkages between the public and private real estate markets.…”