COVID-19 and the daily rate of return of three major industry sector stock price indices related to real estate
| DOI | https://doi.org/10.1108/JPIF-02-2021-0015 |
| Published date | 08 July 2021 |
| Date | 08 July 2021 |
| Pages | 170-196 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Hyesook Min,Seungwoo Shin,Paloma Taltavull de La Paz |
COVID-19 and the daily rate of
return of three major industry
sector stock price indices related
to real estate
Hyesook Min and Seungwoo Shin
Department of Real Estate, Konkuk University, Gwangjin-gu, Republic of Korea, and
Paloma Taltavull de La Paz
Applied Economics, University of Alicante, Alicante, Spain
Abstract
Purpose –This paper analyzes how three major industrial stock indices related to South Korean real estate
industries are affected by the exogenous shock of the measures taken to control COVID-19, coupled with
investor sentiment, which has global impacts.
Design/methodology/approach –The paper uses daily stock market indices on three major stock price
indices: construction industry sector index, real estate operating company (REOC) industry index and the real
estate investment trust (REIT) industry index of the Korea Stock Exchange (KRX), from January 8, 2020, when
the World Health Organization (WHO) began to issue official indicators regarding COVID-19, to March 27,
2020, the last trading day of the week during which the South Korean government’s stock market stabilisation
fund was launched.
Findings –Results indicate the REIT sector’s stock rate of return to be relatively less sensitive to impacts of
COVID-19 compared to those of the two other indices. Impulse response analysis also shows similar results.
Impulse response estimations indicate that earlier information of REITs has prominent significance in
explaining changes in the time series process itself. Similar to findings of prior studies that have been
conducted with long-term perspectives, results of our short-term study indicate that the medium-risk, medium-
return characteristic of the real estate industry has significance even in short-term perspectives.
Practical implications –REITs can be an investment vehicle that provides strong benefits of diversified
investment for mutual fundinvestment managers even in the case of short-term exogenous market disruptions.
Originality/value –The analysis run in the empirical exercise is the first to consider the sensibility between
international stock exchanges to the effects of measures taken to control COVID-19 impact.
Keywords Korea, Returns, REITs, COVID-19, Market sentiments, Stock price indices
Paper type Research paper
1. Introduction
Designated as a pandemic on 11 March 2020, COVID-19 and the measures taken to control its
effects have severely limited the economic activity of nations worldwide, and the stock
market has exhibited the largest and most direct response to the impact of the virus.
On 23 March 2020, the Dow Jones Industrial Average (DJIA) of the United States (US) was
down to 18,592 points [1], a 25.7% decline from 10 March the day just before the pandemic
was declared. The drop is presented in Figure 1. During the same period, the S&P and
NASDAQ indices also declined by 23.4 and 17.8%, respectively. The Korea Composite Stock
Price Index (KOSPI) [2] has also declined, recording 1,458 points on 19 March 2020 [3]. The
change is displayed in Figure 2. Comparing the point just before the pandemic was declared
with the high point in February 2020, the index declined by 25.7 and 35%, respectively.
This study examines the daily rates of return of three major industry indices that are
related to the South Korean real estate industry by utilising daily data. Particularly, the study
emphasised the analysis of the period from January 2020 to March 2020, but cannot capture
the effect of the stock market stabilisation fund that was created by the South Korean
JPIF
40,2
170
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 16 February 2021
Revised 25 April 2021
Accepted 20 May 2021
Journal of Property Investment &
Finance
Vol. 40 No. 2, 2022
pp. 170-196
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-02-2021-0015
government and launched on 25 March 2020 in order to to stabilise the general stock market
that was strongly affected by the pandemic. The stock market stabilisation fund is a
government policy fund that is directly incorporated into the stock market, which may
misconstrue stock price processes or a regime switch [4].
There are several reasons the Korean case is relevant. The first is the size of the Korean
economy. Korea is the 10th largest economy globally regarding GDP (IMF, 2021), and the
commercial real estate market is quite significant in proportion to it. Second, there is a lack of
research findings in Asia (Newell, 2020); furthermore, most of the Korean commercial real
estate studies (Choi and Shin (2017) or Jang et al. (2020)) were primarily published through
Korean journals, and it was difficult for academic audiences to acquire them. Third, the period
analysed in this study covers the first wave of the pandemic in a country where no public
measures of population controls were applied (other than testing). There was no government
policy on the real estate market during the study period until the end of March (25th) when the
stock market stabilisation fund was created. The quick reaction of Korean stock market in a
clear case of a spill-over effect is of a shock hitting the financial market in another part of the
world. From this view, the Korean Stock Exchange is an excellent laboratory to analyse a
natural experiment of a (quick) contagious effect among the financial market and the real
estate assets responses.
The logic behind the analysis in this study is based on the full integration of Korean stock
exchanges globally (Tai, 2007) and the rapid transmission of shocks worldwide. The existing
literature supports the idea of financial market integration and interdependence, stressing the
contagion effect (Tai, 2007;Liow and Ye, 2018;Milunovich and Tr€
uck, 2013;Hoesli and Reka,
2013). The contagion effect captured in this study is the COVID-19 impact on Korean real
estate assets but in a situation in which Korea has no severe infection cases among the
18591.9
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
18,000
20,000
22,000
24,000
26,000
28,000
30,000
32,000
19.10 19.10 19.10 19.11 19.11 19.12 19.12 20.1 20.1 20.2 20.2 20.3 20.3 20.3
DJIA(LHS) VIX(RHS)
→
pandemic
1457.6
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
–
15,000
–
10,000
–5,000
0
5,000
10,000
19.10 19.10 19.10 19.11 19.11 19.12 19.12 20.1 20.1 20.2 20.2 20.3 20.3 20.3
net foreign buying(100mill.krw, LHS)
KOSPI(RHS)
→
pandemic
Figure 1.
COVID-19 and the
daily rate of return of 3
major industry sector
stock price indices
related to real estate
Figure 2.
COVID-19
impact on
stock
exchanges
171
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