Extreme Dependence Between Securitized Real Estate and Stock Markets: an International Perspective

Abstract

In this research, the extreme correlation among extreme returns of securitized real estate and stock markets is estimated following Longin and Solnik (2001), and tail dependence coefficients (TDCs) is estimated by symmetrized Joe-Clayton (SJC) copula model proposed by Patton (2006). The daily returns of 14 global mature financial markets from Asian-Pacific, Europe and North America dating from July, 1992 to August, 2011 are applied here. The properties of the extreme correlation and SJC Copula tail dependence from local, regional and global perspectives are studied, based on the accumulated evidence of global integration and contagion. Finally, we compare extreme correlation and SJC Copula tail dependence we estimated with those common measures in practice, and further investigate the links between extreme correlation and SJC Copula tail dependence. This shed light to portfolio investors building optimized portfolios containing both real estate securities and stocks, interested in international cross-asset investment, for financial practices such as portfolio tail diversification, portfolio selections, portfolio risk management and hedging strategies. It also provides valuable insights for academic researches.