Spillover Risks in REITs and Other Asset Markets
34 Pages Posted: 24 Apr 2015
Date Written: April 22, 2015
Large shocks that spill over from one market to another market become increasingly more prevalent especially in recent years as investors switch liquidity more frequently from markets to markets. This study uses Diebold and Yilmaz (2012) methodology to measure return spillovers across asset markets. We find that total return spillovers account for one-third of total return variances in four asset markets (equity REIT, mortgage REIT, stock, and bond) for the sample period from January 1972 to September 2014. If commercial real estate is included and for a more recent period from February 1998 to September 2014, we find that the average total return spillovers are still relatively high at 28.0%. We find that the total return spillovers and the net return spillovers have significant and negative effects on the returns of equity REIT, mortgage REIT and stock. The return spillovers risks also add incremental premiums to the three asset markets, which are not captured the Fama-French risk premiums. Investors should thus not neglect spillover risks when constructing their asset allocation strategies.
Keywords: Systematic risk, total return spillovers, net return spillovers, own return spillovers, asset returns, REITs, stock, real estate
JEL Classification: G12
Suggested Citation: Suggested Citation