Financial crisis and asian real estate securities market interdependence: Some additional evidence

Abstract

This paper investigates empirically the changes in long-run relationship and short-term linkage among the US, UK and eight Asian real estate securities markets before, during, and after the 1997-1998 Asian financial crisis as well as in the most recent period. Using a combination of Johansen linear cointegration, Bierens nonlinear cointegration, Granger causality tests, variance decomposition analysis and volatility spillover methodology, our results indicate that the degree of market interdependence in Asian real estate securities markets appears to have become stronger in the long run and short term since the Asian financial crisis. Further, this market interdependence seems to be on a rising trend ten years after the Asian financial crisis. This stronger market relationship between the Asian and US markets implies a portfolio combination of these markets is less likely to provide diversification benefit in the form of minimum risk. One important lesson to learn from our study is that portfolio managers should constantly review their international diversification models and strategies with respect to the constituent markets because of possible changes in market interdependence triggered by a major crisis.