Volatility Transmission in Australian REIT Futures

Stevenson

J Real Estate Finan Econ

2012

Self Cite

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%.

Section: : Literature Reviewmentioning

confidence: 96%

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

Stevenson

J Real Estate Finan Econ

2012

Self Cite

Journal of Property Investment &Amp; Finance

“…Literature has explored the power equity markets have in influencing REITs as per Lee (2009); however, this has not been expanded into the realm of industry‐specific volatility. This is in spite of literature that considers the same issue in relation to returns.…”

Section: Introductionmentioning

confidence: 99%

The influence of real estate risk on market volatility

Cheong

Olshansky²,

Zurbruegg³

2011

Purpose -The purpose of this paper is to investigate the causal relationship between risk experienced within the real estate industry and that of the overall market in the UK context. The motivation behind this research is to investigate whether the real estate sector transmits risk to the wider marketplace and whether this phenomenon existed, or was exacerbated, during the most recent financial crisis. Design/methodology/approach -The study was undertaken over a 20-year timeframe, from 1990 to 2010, with special attention being awarded to the global financial crisis (GFC) period from 2008 to 2010. The paper first undertakes graphical modeling of market and industry volatilities in an attempt to identify which industry drives market uncertainty. This is followed by quantitative computation of industry-specific volatility, which is employed in examining the relationship between these volatilities using block exogeneity/Granger causality tests. Rolling sample analysis and impulse response functions are employed as robustness tests to substantiate the main results. Findings -First, the analysis confirms research that finance industry volatility is a leader in driving market volatility. Second, it expands on these findings to identify the real estate sector as being a key source of this causal relationship. It finds that real estate risk is the one that regularly drives finance industry volatility over the 20-year sample period. Third, and most importantly, it emerges that the causal link between the real estate sector and market volatility is at its strongest leading up to the most recent financial crisis. More specifically, the real estate investment trusts sub-sector of real estate industry volatility is the one that has the strongest unidirectional relationship with market-wide volatility, both directly and indirectly, through driving the finance industry volatility during the GFC. Originality/value -These findings are significant for market participants, such as pension funds, which need to protect their assets from a stock market crash. Furthermore, anticipating a downturn by observing the trends in real estate sector volatility is highly advantageous in informing their trading strategies now and into the future. Policy makers likewise need a signal of an impending credit crunch and can utilize real estate market statistics to pre-empt a freezing up of the credit markets.

“…This means that the volatilities of these assets are varying over time and that high periods of volatility tend to be clustered and vice versa. Strong volatility clustering effects are also evident by Lee (2009) in A-REITs and A-REIT futures. In other words, a GARCH model is preferred to estimate the optimal hedge ratio for REIT futures.…”

Section: Data and Methodology Datamentioning

confidence: 92%

Hedging effectiveness of REIT futures

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.