Testing the Predictability and Efficiency of Securitized Real Estate Markets

Abstract

This paper conducts tests of the random walk hypothesis and market efficiency for 14 national public real estate markets. Random walk properties of equity prices influence the return dynamics and determine the trading strategies of investors. To examine the stochastic properties of local real estate index returns and to test the hypothesis that public real estate stock prices follow a random walk, the single variance ratio tests of Lo and MacKinlay (1988) as well as the multiple variance ratio test of Chow and Denning (1993) are employed. Weak-form market efficiency is tested directly using non-parametric runs tests. Empirical evidence shows that weekly stock prices in major securitized real estate markets do not follow a random walk. The empirical findings of return predictability suggest that investors might be able to develop trading strategies allowing them to earn excess returns compared to a buy-and-hold strategy.

Real estate returns predictability revisited: novel evidence from the US REITs market

“…The existing literature has largely documented evidence of positive serial correlation of real estate returns (see for example Case and Shiller, 1989;Hill et al, 1997;1999;Schindler et al, 2010;Schindler, 2013), however, the results on whether this finding is exploitable in terms of trading strategies is quite inconclusive.…”

Market Efficiency in the Emerging Securitized Real Estate Markets

“…While there is abundant empirical evidence today that developed stock markets are at least weak form efficient and investors are not able to earn excess returns compared to a buy-and-hold strategy by developing and using trading strategies, this finding is more controversial for emerging markets. Thus, the crucial question of the analysis is whether the results from stock markets also hold for securitized real estate markets -in particular against the background that the efficient market hypothesis is rejected for even several developed securitized real estate markets, as shown by Schindler et al (2009) as well as Serrano and Hoesli (2009)…”

“…However, stock returns are more predictable than securitized real estate returns in some of the countries which have only recently established REIT regimes. Schindler et al (2009) conduct a more comprehensive study by testing the efficient market hypothesis for 14 national real estate stock markets from January 1990 to December 2006. They conclude that real estate stock markets are less efficient than international stock markets, implying that empirical findings suggest that investors are likely to earn excess returns by using past information in the majority of the public real estate markets.…”

“…They conclude that real estate stock markets are less efficient than international stock markets, implying that empirical findings suggest that investors are likely to earn excess returns by using past information in the majority of the public real estate markets. The study conducted by Schindler et al (2009) mainly focuses on matured and relatively large securitized real estate markets. However, to our knowledge, no study on testing the hypothesis of weak-form market efficiency for emerging securitized real estate markets has yet to be conducted.…”

Further Evidence on the (In-) Efficiency of the U.S. Housing Market

“…One of the few internationally oriented studies analyzing eleven national real estate stock markets was conducted by Stevenson (2002). Schindler et al (2009) conduct a more comprehensive study by testing the efficient market hypothesis for 14 national real estate stock markets from January 1990 to December 2006. They conclude that real estate stock markets are less efficient than international stock markets and the empirical findings suggest that investors are likely to earn excess returns by using past information in most of the public real estate markets.…”