Predicting Securitized Real Estate Returns: Financial and Real Estate Factors vs. Economic Variables
AbstractSecuritized real estate returns have traditionally been forecasted using economic variables. However, no consensus exists regarding the variables to use. Financial and real estate factors have recently emerged as an alternative set of variables useful in forecasting securitized real estate returns. This paper examines whether the predictive ability of the two sets of variables differs. We use fractional cointegration analysis to identify whether long-run nonlinear relations exist between securitized real estate and each of the two sets of forecasting variables. That is, we examine whether such relationships are characterized by long memory, short memory, mean reversion (no long-run effects) or no mean reversion (no long-run equilibrium). Empirical analyses are conducted using data for the U.S., the U.K., and Australia. The results show that financial and real estate factors generally outperform economic variables in forecasting securitized real estate returns. Long memory (long-range dependence) is generally found between securitized real estate returns and stocks, bonds, and direct real estate returns, while only short memory is found between securitized real estate returns and the economic variables. Such results imply that to forecast securitized real estate returns, it may not be necessary to identify the economic variables that are related to changing economic trends and business conditions.
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Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 09-08.
Length: 35 pages
Date of creation: Mar 2009
Date of revision:
Fractional Cointegration; Fractionally Integrated Error Correction Model (FIECM); Forecasting; Multifactor Models; Securitized Real Estate; REITs;
Find related papers by JEL classification:
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-06-03 (All new papers)
- NEP-BEC-2009-06-03 (Business Economics)
- NEP-FMK-2009-06-03 (Financial Markets)
- NEP-FOR-2009-06-03 (Forecasting)
- NEP-URE-2009-06-03 (Urban & Real Estate Economics)
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