COMMON MARKET AND ECONOMIC INFORMATION ON THE VARIABILITY OF RETURNS OF DIRECT AND INDIRECT REAL ESTATE MARKET

Abstract

It has always been of great interests to investors and academics to find out if property stock prices move in tandem with property prices. Traditionally, the property stock market has been regarded as a proxy for the direct real estate market. By thinking so, investors assume that information in one market will affect the other in the same way if the markets are efficient. There were many studies carried out to test the integration of the two markets, but the results were inconclusive. This study hopes to offer an alternative way of testing the integration of the two markets by examining whether the variations of their returns are the same under the influence of common market (All Share Price Index (SESI)) and economic (interest rate (INT)) information. If the two markets are integrated, common market and economic information should affect the returns in both the property stock market and the direct real estate market by the same way and to the same extent. The results in this study showed that the common equity market factor (SESI) affects concurrently both direct and indirect real estate market. Further investigations revealed that the SESI market information does not have the same effects on the variability of returns in the direct and indirect real estate markets. Therefore, the two markets are not perfectly integrated. The findings imply that investors will be able to achieve risk reduction through diversifying the portfolio holdings in direct and indirect real estate markets.