RISK-RETURN CONVERGENCE AND LINKAGES IN INTERNATIONAL SECURITIZED REAL ESTATE MARKETS

Abstract

With deepening market linkages, the correlation structure and risk-return characteristics of the international securitized real estate markets may have evolved over time. Numerous studies have addressed the issue of the changing international correlation structure but not that of the risk-return characteristics. It is noted that increasing correlation structure does not necessarily imply any specific changes in risk-return characteristics. The main objective of this study is to examine the historical evolution of risk-return characteristics of the sample 14 developed real estate securities markets. The study also attempts to investigate the factors that affect risk-return convergence, and to understand the impact of global market conditions upon convergence. Lastly, the relationship between correlation and convergence is studied. The risk-return distance among the securitized real estate markets is first computed using the Euclidean distance measure. The results indicate the cross-market risk-return distance of the sample 14 developed real estate securities markets have converged significantly for the sample period 1993 to 2007, implying a risk-return convergence. The convergence is propelled by both risk and return convergence. In particular, the average risk-return distance has decreased by approximately 35% for the duration of the sample period. The speed of convergence, however, varies differently across the individual markets, which is attributed mainly to the initial distance of each individual market from the international average risk-return characteristic. Furthermore, the documented risk-return convergence remains robust even with the inclusion of varying global market conditions. It is also found that increasing correlation across the markets does not necessarily imply any specific change in their risk-return characteristics.