Time dependent behavior of the Asian and the US REITs around the subprime crisis
| Published date | 20 April 2012 |
| Pages | 282-303 |
| DOI | https://doi.org/10.1108/14635781211223833 |
| Date | 20 April 2012 |
| Author | Chien‐Yun Chang,Jian‐Hsin Chou,Hung‐Gay Fung |
| Subject Matter | Property management & built environment |
Time dependent behavior of the
Asian and the US REITs around
the subprime crisis
Chien-Yun Chang
Department of Finance Management,
Hsiuping University of Science and Technology, Taiwan, ROC
Jian-Hsin Chou
Department of Risk Management and Insurance,
National Kaohsiung First University of Science and Technology,
Taiwan, ROC, and
Hung-Gay Fung
College of Business Administration, University of Missouri-St Louis,
St Louis, Missouri, USA
Abstract
Purpose – The study uses an AR(1)-EGARCH(1,1) model to investigate the pricing behaviors of the
real estate investment trusts (REITs) for four countries (Australia, Japan, Taiwan and the USA) before
and after the 2007 financial crisis.
Design/methodology/approach – The study uses an AR(1)-EGARCH(1,1) model to investigate the
pricing behaviors of the REITs.
Findings – The results show that after the financial crisis, REITS returns show a stronger linkage to
the overall market returns but they are not sensitive to expected interest rate movements, except for
the Taiwanese REIT market, which shows a negative and significant reaction to the interest rates.
There are stronger asymmetric effects of good and bad news on REIT returns particularly after the
post financial crisis for the four REIT markets.
Research limitations/implications – An examination of the relationship between REIT and the
stock market provides information as how REIT provides an effective device related to the stock
portfolio diversification.
Practical implications – It would be interesting to see how the Asian REIT markets differ from the
US market on return and risk behavior.
Originality/value – The 2007 subprime crisis happened because of the decline of the real estate
market prices in the USA. It represents a special opportunity to examine the time-dependent behavior
of REIT returns in a turbulent market environment.
Keywords Real estate investment trusts, Stockmarket returns, Interest risk, Asymmetric effects,
Real estate, Investments, Trusts, Australia, Japan, Taiwan,United States of America
Paper type Research paper
Introduction
The real estate investment trusts (REITs), which are similar to a close-end fund, have
been a popular investment tool for over 40 years in the USA since 1960. The REITs can
offer investors an opportunity to participate in the property-related security in terms
of higher liquidity and better diversification. The REITs are generally issued by
financial institutions, which are responsible for gathering money, investing in real estate
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JPIF
30,3
282
Journal of Property Investment
& Finance
Vol. 30 No. 3, 2012
pp. 282-303
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781211223833
business and paying out dividends to the security holders. The REIT markets provid e
an alternative investment vehicle other than the stock market because it has become
an asset class and thus have become an investment tool for investors, financial
institutions, and portfolio managers (Chan et al., 2003).
This study uses a non-linear asymmetric generalized autoregressive conditional
heteroskedasticity (GARCH) model proposed by Engle and Ng (1993) to investigate the
pricing behavior of four REITs in Australia, Japan, Taiwan, and the USA before and
after the 2007 financial crisis, which was triggered initially by the real estate market in
the USA. These four REIT markets have important real estate markets in the regions.
Thus, our study contributes to the REIT literature in several ways.
First, the return behavior of REITs based on a time-variant model, using GARCH
has been examined in Europe and the USA (Devaney, 2001), while the Asian REITs are
not. We intend to fill this gap. REITS are unique because of their organizational
structure and regulations as shown by Chaudhry et al. (2004). It would be interesting to
see how the Asian REIT markets differ from the US market.
Since the summer of 2007, the fallout from the subprime mortgage crisis has been
spreading across the globe. This systematic financial disaster, triggered by a dramatic
rise in mortgage delinquencies and foreclosures in the USA escalated rapidly into the
downturn of whole financial economics, causing the credit crunch, stock market
collapse, and consumption reduction. Many banks, mortgage lenders, REITs, and hedge
funds suffered significant losses as a result of the mortgage payment defaults. Because
the subprime crisis was due to the decline in the US real estate prices, our study provides
a good opportunity to examine how well the Asian REITs perform in a turbulent global
market environment as compared to the US market.
Second, an examination of the relationship between REIT and the stock market
provides us information as how REIT provides an effective device related to the stock
portfolio diversification (Klemkosky and Martin, 1975). Some studies attempted to treat
REITs as a proxy of the assessment of market value of real estate (Gyourko and Keim,
1992), while Glascock et al. (2000) point out that REITs can hedge some economic risks
such as inflation, which is consistent with the results of Darrat and Glascock (198 9).
Chandrashekaran (1999) supports the risk diversification argument and indicates that
REIT returns are related to their historical returns, while Liu and Mei (1992) indicate that
REITs are like the small stocks. Other studies tend to show that REITs behave like
common stocks rather than the real estate variables but Hudson-Wilson (2001)
concludes that the performance of REITs are inferior to the stock and bond portfolios.
Third, we investigate how REIT returns are affected by the expected interest rate risk
and the general economic environment. To this end, we examine the slope factor and
credit spread that are two important variables from the bond market literature used to
explain the stock returns (Chen et al., 1986; Shanken and Weinstein, 1990; Fama and
French, 1993). The slope measure of the interest yield curve represents the expected
forward interest rate movements, thus it is a proxy for the expected interest rate
movements, while the credit spread variable is a proxy for the general economic activity.
Chen and Tzang (1988) and Allen et al. (2000) have shown a strong linkage among the
credit spread, interest rates, and REIT returns while others indicate that REITs are less
exposed to the interest rate factor (Liang and Webb, 1995; Mueller and Pauley, 1995).
Finally, we examine how the risk of the real estate price changes affects REIT returns
by incorporating the EGARCH-in-the-mean model into our analysis. Corgel et al. (1995)
Time dependent
behavior of
REITs
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