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Correlation and Volatility Dynamics in REIT Returns: Performance and Portfolio Considerations

Peng Fei, Letian Ding and Yongheng Deng
The Journal of Portfolio Management Winter 2010, 36 (2) 113-125; DOI: https://doi.org/10.3905/JPM.2010.36.2.113
Peng Fei
is a doctoral candidate affiliated with the Lusk Center for Real Estate at the University of Southern California in Los Angeles, CA.
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  • For correspondence: pfei@usc.edu
Letian Ding
is a doctoral candidate in the Department of Physics and Astronomy at the University of Southern California in Los Angeles, CA.
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  • For correspondence: letiand@usc.edu
Yongheng Deng
is a professor in the School of Policy, Planning, and Development at the University of Southern California in Los Angeles, CA.
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  • For correspondence: ydeng@usc.edu
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Abstract

In this article, the authors examine the dynamics of the correlation and volatility of REITs, stocks, and direct real estate returns using monthly data from January 1987 to May 2008. In order to explore asymmetries in conditional correlation, the authors use a multivariate asymmetric dynamic diagonal conditional correlation (AD-DCC) GARCH specification. They document that the time-varying conditional correlations can be explained by macroeconomic variables, such as term and credit spreads, inflation, and the unemployment rate, and they find a strong relationship between correlations and REIT returns and that the patterns are distinguishable for different types of REITs. Interestingly, when the correlation between REITs and the S&P 500 is at its lowest, the future performance of REITs is at its highest. For equity REITs, a robust relationship exists between correlations and future returns; that is, the higher (lower) correlation between equity REITs and direct real estate, the higher (lower) the future returns of equity REITs. The authors’ results have economic implications regarding the time-dependent diversification benefits of REITs in a mixed-asset portfolio and the unique risk and return characteristics of REITs.

TOPICS: Volatility measures, VAR and use of alternative risk measures of trading risk, analysis of individual factors/risk premia

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The Journal of Portfolio Management: 36 (2)
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Correlation and Volatility Dynamics in REIT Returns: Performance and Portfolio Considerations
Peng Fei, Letian Ding, Yongheng Deng
The Journal of Portfolio Management Jan 2010, 36 (2) 113-125; DOI: 10.3905/JPM.2010.36.2.113

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Correlation and Volatility Dynamics in REIT Returns: Performance and Portfolio Considerations
Peng Fei, Letian Ding, Yongheng Deng
The Journal of Portfolio Management Jan 2010, 36 (2) 113-125; DOI: 10.3905/JPM.2010.36.2.113
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