Asymmetric Correlation and Volatility Dynamics among Stock, Bond, and Securitized Real Estate Markets

Abstract

We apply a multivariate asymmetric generalized dynamic conditional correlation GARCH model to daily index returns of S&P500, US corporate bond, and their real estate counterparts (REITs and CMBS) from 1999 to 2008. We document, for the first time, evidence for asymmetric volatilities and correlations in CMBS and REITs. Due to their high levels of leverage, REIT returns exhibit stronger asymmetric volatilities. Also, both REIT and stock returns show strong evidence of asymmetries in their conditional correlation, suggesting reduced hedging potential of REITs against the stock market downturn during the sample period. There is also the evidence that corporate bonds and CMBS may provide diversification benefits for stocks and REITs. Furthermore, we demonstrate that default spread and stock market volatility play a significant role in driving dynamics of these conditional correlations and that there is a significant structural break in the correlations caused by the recent financial crisis.

The Impact of the Global Financial Crisis on the Co-Integration Relationship between Reit and Stock Markets: A Dynamic Co-Integration Approach

“…First, there is quite convincing empirical evidence (mentioned in the introduction) which shows that there was a structural break during 2007. Yang et al (2012) , for example, demonstrates a structural break on July 31, 2007 using Chow test which is a date very close to the one adopted by us. Also, the uptrend of S&P500 index was already over by the end of July 2007 indicating growing concerns in the market.…”

“…The market capitalization value of the U.S. REIT's, for example, increased from from $8.7 billion at the end of 1990 to $438 billion at the end of 2006 (Yang et al, 2012).…”

Economic value of modeling covariance asymmetry for mixed-asset portfolio diversifications

“…REITs are included for two reasons: first, REITs, along with stocks, are rich in the feature of covariance asymmetry (e.g. Hung and Glascock, 2010;Liow, 2012;Yang et al, 2012;Zhou and Kang, 2011;etc. ); second, they are a distinctive investment alternative to stocks by allowing easy access to real estate investments without directly owning or managing the underlying assets.…”

Are Stock Market Returns in the CEE Countries and in the Eurozone, Russia, and the United States Asymmetric?

“…2007; Longin and Solnik 2001;Yang et al 2012) have documented that correlations between asset returns are higher in down (bear) markets, when returns fall, than they are in up (bull) markets, when returns rise. An increase in correlation in the down markets implies that the benefits of diversifying are substantially reduced.…”

“…Existing empirical studies that have analyzed time-varying and potentially asymmetric dependence structures in stock markets have predominantly applied multivariate GARCH (generalized autoregressive conditional heteroskedasticity) models (Cappiello et al 2003;Vek et al 2012;Yang et al 2012) and copula functions (Kang et al 2010), and recently developed tests of asymmetric dependence (Ang and Chen 2002;Hong et al 2007;Longin and Solnik 2001).…”