CYCLICAL RELATIONSHIPS BETWEEN SECURITIZED REAL ESTATE AND STOCK MARKETS

Abstract

Understanding cyclical activity of the securitized real estate and stock markets is an important component of efficient portfolio management. Real estate market exhibits periods of boom and slump, noticeably during the late 1980s and period of Asia Financial Crisis. By taking the cyclical fluctuation into appraisal models, unrealistic valuation can be avoided. Besides, the understanding of co-movement of both securitized real estate and stock markets allows portfolio managers to perform tactical assets allocation. Hence, the aim of this research is to gain in-depth understanding of the cyclical behaviour in the securitized real estate and stock markets. The securitized real estate and stock indexes from seven countries are selected for this research; the countries are Hong Kong, Japan, Malaysia, Singapore, Thailand, United Kingdom and the United States of America. Hodrick-Prescott (HP) filter and spectral analysis are two different domain techniques employed to ascertain the cyclical patterns in the two investment markets. HP-filter is a time-domain technique whereas spectral analysis is a frequency-domain method. The results from these two domains complement each other. The securitized real estate and stock markets are found to present underlying cyclical patterns and both markets of all six countries, Hong Kong, Japan, Malaysia, Singapore, Thailand and UK, are highly co-related with one another. They tend to move closely together, therefore providing low diversification benefits when included in an inter-asset portfolio. The exception country is USA where the two markets provide relatively higher diversification benefits with their low correlation coefficient. In addition, it appears that the stock market leads the securitized real estate market by 2-3 months for USA in the short run. Investors will thus benefit by holding two assets in their portfolio. This study provides empirical evidence of cyclical behaviour in securitized real estate and stock markets which aim to contribute to the body of knowledge in the cyclical studies of real estate.