Hedging effectiveness of REIT futures
| DOI | https://doi.org/10.1108/14635781211223824 |
| Published date | 20 April 2012 |
| Pages | 257-281 |
| Date | 20 April 2012 |
| Author | Chyi Lin Lee,Ming‐Long Lee |
| Subject Matter | Property management & built environment |
Hedging effectiveness of REIT
futures
Chyi Lin Lee
School of Economics and Finance, University of Western Sydney, Sydney,
Australia, and
Ming-Long Lee
Department of Finance, National Dong Hwa University, Taiwan
Abstract
Purpose – 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.
Keywords Hedgingeffectiveness, Realestate investment trust futures,Real estate, Trusts, Investments,
Australia, Japan
Paper type Research paper
1. Introduction
REITs have been the most successful indirect property investment vehicles in
Australia and Japan. The Australian and Japanese REIT markets are also two of the
largest REIT markets in the world. Among the top five REIT markets as of December
2010, Australia was the second largest REIT market in the world with a market
capitalisation of £52 billion, and Japan was the fourth largest market with a market
capitalisation of £28 billion. Both Australian and Japanese REIT markets account for
17 percent of the global REIT market (Macquarie Research, 2011) (Figure 1).
The global financial crisis (GFC) has had a strong negative impact on REIT markets.
The annualised risk of the S&P Global REIT index has increased dramatically from
13 to 30 percent over 2007-2010. Similar trend was also evident in the Australian
The current issue and full text archive of this journal is available at
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The authors would like to thank Nick French (the editor), anonymous referees and participants at
the 16th AsRES/AREUEA Joint Conference for their constructive comments.
Hedging
effectiveness
257
Journal of Property Investment
& Finance
Vol. 30 No. 3, 2012
pp. 257-281
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781211223824
and Japanese REIT markets. The crisis has increased the volatility of REITs
significantly. This has resulted in a significant loss of the traditional “low risk” defensive
characteristics of REITs. The crisis has also clearly highlighted the importance of
employing an effective hedging tool to reduce the exposure of REIT investment portfolio
to market risk (Figure 2).
In 2002, the Australian Securities Exchange (ASX) introduced the first REIT futures
in the world. In 2008, similar products have also been established in Japan.
Futures contracts are one of the most common types of derivatives. A futures contract
Figure 1.
The global top five REIT
markets: December 2010 Source: Macquarie Research (2011)
Note: £1 = US$0.62 (February 2011)
Figure 2.
Four-year rolling
annualised standard
deviations of the global,
Australian and Japanese
REIT markets: 2007-2010 Source: DataStream (2011)
Notes: The S&P Global REITs Index represents the global REITs market, the
S&P/ASX 200 A-REITs Index represents the A-REITs market and the TSE
REITs Index represents the J-REITs market
JPIF
30,3
258
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