Can Linear Predictability Models Time Bull and Bear Real Estate Markets? Out-of-Sample Evidence from REIT Portfolios

Bianchi, Daniele; Guidolin, Massimo

doi:10.1007/s11146-013-9411-6

Cited by 10 publications

(5 citation statements)

References 53 publications

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“…This variable, which is negatively related to gross domestic product (GDP; Knotek, 2007), proxies for demand for space which in turn affects real estate prices (Brooks and Tsolacos, 1999). It has also been used as a proxy for the general state of the economy in previous studies (Bianchi and Guidolin, 2014;Fei et al, 2010). In our analysis, we substituted unemployment with GDP, and results were qualitatively similar.…”

Section: Other Control Variablesmentioning

confidence: 72%

An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market

Das¹,

Freybote

Marcato

2014

J Real Estate Finan Econ

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Institutional investors such as pension funds or insurance companies commonly invest in the unsecuritized and securitized real estate market. We investigate how institutional investor sentiment in the commercial real estate market affects institutional trading behavior in the REIT market and subsequently asset pricing. In particular, we test two alternative theoriesflight to liquidity and style investing theory -to explain the sentiment-induced trading behavior of institutional investors in the REIT market for the pre-crisis (2002-2006), crisis (2007-2009) and post-crisis (2010)(2011)(2012) period. We find that the applicability of either theory depends on economic conditions. In the pre-crisis period institutional investors switched capital in and out of REITs based on their sentiment in the private market (style investing). However, in the crisis period institutional investors switched capital from the illiquid private market to the more liquid REIT market (flight to liquidity). The flight to more liquid REITs continued into the post-crisis to a lesser extent and suggests that the financial crisis has changed institutional investment behavior. Our findings hold across different groups of REITs (e.g. high and low institutional ownership, S&P and non-S&P REITs) and property types. We also find that institutional real estate investor sentiment introduces a non-fundamental component into REIT pricing.

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Section: Other Control Variablesmentioning

confidence: 72%

An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market

Das¹,

Freybote

Marcato

2014

J Real Estate Finan Econ

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“…Our empirical findings compare with Bianchi and Guidolin (2014) who forecast all REITs returns traded on the U.S. stock market based on Markov switching vector autoregression models for the period January 1972 to December 2012. The authors report annualized returns of 12.6% and CER of 5.7% that are well below our estimated returns and CER, presumably due to the limiting flexibility of the linear form of the models considered.…”

Section: Economic Evaluationmentioning

confidence: 93%

Deciphering the U.S. metropolitan house price dynamics

Plakandaras

Pragidis

Karypidis

2023

Real Estate Economics

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In this article, we propose a novel estimator that builds on recent advances in heterogenous estimators to introduce the concepts of cross‐sectional heterogeneity and cross‐sectional dependency in the machine learning (ML) literature. The performance of the proposed method is evaluated in forecasting house prices at the county level for the 56 most populated Metropolitan Statistical Areas in the U.S., identifying bubbles in local house markets as they form and measuring the returns on a trading strategy based on model's forecasts. In doing so, we find that the proposed method achieves an out‐of‐sample error of 0.252 in house prices forecasting, while the most accurate econometric estimator has a forecasting error of 0.678 and the most accurate ML 0.763. In terms of bubble identification, the proposed model achieves a 0.470 recall against 0.390 and 0.380 of the most accurate econometric and ML, respectively. Finally, in terms of economic significance, a diversified portfolio of Real Estate Investment Trust stocks achieves an averaged return of 13.1%, which is twice as large as the second most profitable trading strategy. Our work has direct policy implications to market participants and monetary policy authorities as it shapes a new local approach to monitoring the real estate market.

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“…The literature depicts that macroeconomic variables may not contain explanatory power to predict the return of REITs, either in the USA or in the Japanese market (Demiralay and Kilincarslan, 2022; Fang et al ., 2016). Another possibility to include the variables is by using the time-varying Markov switching model (Bianchi and Guidolin, 2014), but it is beyond the scope of this study.…”

Section: Notesmentioning

confidence: 99%

The dynamic role of the Japanese property sector REITs in mixed-assets portfolio

Razak

2023

JPIF

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PurposeThis study examined the dynamic role of the Japanese property sector, particularly the real estate investment trusts (REITs), in mixed-asset portfolios of stocks and bonds, as well as office, retail, hotel and residential REITs.Design/methodology/approachDaily data were retrieved from 01 January 2008 to 31 December 2019. The sample time frame consisted of in-sample and out-of-sample periods. The dynamic conditional correlation-generalised autoregressive conditional heteroskedastic (DCC-GJRGARCH) model was deployed to obtain the forecast estimates of time-varying volatility of REITs and correlations with other assets. The estimates were employed to construct out-of-sample portfolios based on the three assets for daily investment. The five sets of portfolios with each individual property sector REITs, as well as a portfolio of stocks and bonds that served as a benchmark, were produced. The average utility for each set of portfolios was estimated and compared with the average utility of the benchmark portfolio. The average transaction cost (TC) for portfolio rebalancing was calculated as well.FindingsThe forecast of volatility estimates for each property sector revealed that each asset displayed a similar pattern with the differences in the volatility magnitude. Notably, hotel and retail REITs were more volatile than other property sector REITs. The property sector REITs exhibited a positive correlation with stocks but negatively linked with bonds. The results unveiled the diversification benefits of incorporating property sector REITs. The portfolio with property sector REITs had higher risk-adjusted returns and utility, compared to portfolio consisting of stocks and bonds. The benefits outweighed the TC for portfolio rebalancing.Practical implicationsThis study highlights the importance of quantifying the conditional time-varying volatility and correlations of the property sector REITs with other asset returns, especially for investment decision, to select and include property sector REITs in mixed-asset portfolios. For fund managers seeking liquid assets in daily investment, this analysis suggests the inclusion of hotel and retail REITs to enhance REITs' portfolio performance.Originality/valueThis study is the first to investigate the dynamic characteristics of the volatility and correlation of each property sector REITs with other financial assets by employing the conditional framework that accounted for short- and long-run persistency in economic shocks. The reported outcomes shed light on the differences in the underlying properties that contribute to the variances in dynamic volatility of each sector REITs, as well as REITs' correlations with stocks and bonds. This application enables the authors to transmit the dynamics of variance-covariance matrix amongst each property sector REITs, stocks and bonds into asset allocation problem on a daily basis.

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Can Linear Predictability Models Time Bull and Bear Real Estate Markets? Out-of-Sample Evidence from REIT Portfolios

Cited by 10 publications

References 53 publications

An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market

An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market

Deciphering the U.S. metropolitan house price dynamics

The dynamic role of the Japanese property sector REITs in mixed-assets portfolio

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