Regime switching in international securitized property markets

Abstract

This study investigates the existence and nature of return and volatility shifts in international securitized real estate market as well as the impact of economic factors on them from the regime switching perspective over the period from 1987 to 2004. The findings indicate that securitized real estate markets have strong switching behavior and exist either in a low return-high volatility state or in a high return-low volatility state. In addition, the economic shocks to securitized property expected returns are state-dependent and asymmetric, with the macroeconomic factor shocks impacting the securitized real estate expected returns in recession greater than in expansion. Strong evidence of asymmetric return structure is detected in international securitized real estate markets and regime switching could improve the real estate asset allocation. The findings therefore have important implications for optimal asset allocation and portfolio performance in international real estate markets.