Hedging REIT Returns Using the Futures Markets

Journal of Property Investment &Amp; Finance

2012

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.

Section: Reits and Futures Contracts For Stock Indices Interest Rates And Foreign Currenciessupporting

confidence: 80%

Section: Literature Reviewmentioning

confidence: 99%

Hedging effectiveness of REIT futures

Journal of Property Investment &Amp; Finance

2012

“…Giliberto, 1993;Stevenson, 2000). Studies such as Oppenheimer (1996) and Liang et al (1998) demonstrated the importance of introducing specific real estate related contracts as futures contracts written on stocks, interest rates, commodities and metals offer very weak hedging performance in a real estate stock context. Comparable evidence is also reported by Chaudhry et al (2010), although this study did find that contracts based on energy-related products can provide some hedging benefits.…”

Section: : Literature Reviewmentioning

confidence: 99%

“…Furthermore, the importance of index futures contracts based on real estate securities has long been highlighted (e.g. Oppenheimer, 1996;Liang et al, 1998;Newell & Tan, 2004;Clayton, 2007;Ong & Ng, 2009). In principle, an index futures contact would offer an opportunity for institutional investors to reduce the risk of their portfolios, provide an alternative means of gaining exposure to the real estate security sector Europe does provide an interesting case study in the examination of the introduction of index futures for real estate security markets.…”

Section: : Introductionmentioning

confidence: 99%

Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Futures

Stevenson

J Real Estate Finan Econ

2012

In 2007 futures contracts were introduced based upon the listed real estate market in Europe.Following their launch they have received increasing attention from property investors, however, few studies have considered the impact their introduction has had. This study considers two key elements. Firstly, a traditional GARCH model, the approach of Bessembinder & Seguin (1992) and the Gray's (1996) Markov-switching-GARCH model are used to examine the impact of futures trading on the European real estate securities market.The results show that futures trading did not destabilize the underlying listed market.Importantly, the results also reveal that the introduction of a futures market has improved the speed and quality of information flowing to the spot market. Secondly, we assess the hedging effectiveness of the contracts using two alternative strategies (naïve and OLS models). The empirical results also show that the contracts are effective hedging instruments, leading to a reduction in risk of 64%.

Journal of Real Estate Portfolio Management

“…Earlier works (see Oppenheimer [1996], Liang et al [1998], Chatrath & Liang [1999]) exploring suitable hedging vehicles for REITs were primarily motivated by two issues: the lack of liquid futures contract designed specifically for hedging risk associated with REITs; and the large holdings of REITs by institutions which, according to Chaudhry et al (2010), makes compelling the analyses of suitable hedging instruments for REITs. Liang et al [1998] conclude that REIT returns are not hedgeable by stocks, interest rates, commodities and metals' futures contracts to call for the development of futures contract specifically written on REITs.…”

Section: Introductionmentioning

confidence: 99%

Cross Hedging Effectiveness of Real Estate Securities Exchange Traded Funds

Addae‐Dapaah

Abdullah²

2020

The analyses cover different full sample periods from 2000 to 2010 inclusive, the global financial crisis (GFC) period and four phases of the GFC depending on data availability to document the performances of the hedge during times of high and low volatility. The results show that the real estate ETFs were very effective in hedging EREIT and all the sampled real estate securities in Europe and Asia. Secondly, VECM hedge marginally outperformed OLS hedge when the ETFs and the real estate securities returns were cointegrated. Thirdly, we find that hedging effectiveness evidenced by variance reduction does not necessarily equate to economic viability. Therefore it is advisable to use VR and UIs together to determine viability of hedging effectiveness. Finally, given different levels of risk aversion vis-à-vis expected utility, it was, and therefore may be concluded that it could be, advisable/inadvisable to use the ETFs to hedge during periods of high/low volatility.