Diversification, economic impact and volatility modeling of Asian real estate investment trusts

Abstract

A significant amount of past literature in real estate have focussed on the diversification benefits, the macroeconomic influence, and the volatility behaviour of Real Estate Investment Trusts (REITs) in the United States (US) and the Asian property markets. However, studies focussing on the Asian REIT markets consisting of Japan, Singapore, Hong Kong, Malaysia, Thailand, Taiwan and South Korea are far in between. Using data drawn from the Asian REIT markets beginning from the date each market was established until the end of December 2014, this study examines the existence of international diversification among the Asian REIT markets based on the perspective of the long run and short term relationship. A subperiod analysis focussing on the international diversification of the Asian REIT markets during the global financial crisis is also examined. Linked to that, this study also identifies the relevant macroeconomic factors which could influence the return performance and volatility of the returns of the Asian REIT markets. The performance of the volatility models in forecasting the volatility pattern of the Asian REIT markets is also assessed. For the purpose of testing the long term and short run relationship, the Johansen co-integration test model and the Granger causality test model were used. To investigate the volatility spillover effects of this study, the Multivariate Generalized Autoregressive Conditional Heteroskedasticity model was applied. To forecast the volatility of the REIT Index, the Autoregressive Conditional Heteroskedasticity (ARCH) family model was used. Results indicate that crossborder diversification opportunities exist even though the markets were cointegrated since the global financial crisis. Analysis of the macroeconomic impact towards the individual REIT market’s return and volatility suggests that the integration of the macroeconomic variables with the REIT market’s returns vary across countries. Nonetheless, there was no significant evidence to show that the macroeconomic variables affect the volatility of the REITs return. Finally, the Fractional Integrated Generalized Autoregressive Conditional Heteroskedasticity (FIGARCH), Asymmetric Power Autoregressive Conditional Heteroskedasticity (APARCH) and Fractional Integrated Asymmetric Power Autoregressive Conditional Heteroskedasticity (FIAPARCH) models were found to be more effective compared to other models in forecasting the volatility of the respective Asian REITs markets. The outcome of this study is relevant to several parties. For instance, it serves as a useful reference for the Asian REIT investors in making a more informed investment decision and it also enables policy makers to better understand the implications of any policy changes made on the respective REIT markets.