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Testing the Forecasting Power of Global Economic Conditions for the Volatility of International REITs using a GARCH-MIDAS Approach

Author

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  • Afees A. Salisu

    (Centre for Econometric and Allied Research, University of Ibadan, Ibadan, Nigeria; Department of Economics, University of Pretoria, Private Bag X20, Hatfield, 0028, South Africa)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Elie Bouri

    (School of Business, Lebanese American University, Lebanon)

Abstract

We examine the power of global economic conditions (GECON) in forecasting the daily return volatility of various international Real Estate Investment Trusts (REITs) indices. To this end, we use the GARCH-MIDAS framework due to the mixed frequencies of the variables under study and given its merit of circumventing the problems of information loss due to data aggregation and biases through data disaggregation. The results show evidence of forecast gains in the model that accommodates GECON, and significant in-sample forecastability where improvements in global economic conditions lower the risk associated with the international REITs particularly in the US and emerging markets. Further analysis shows the possibility of gaining higher returns on REITs by exploiting the information contents of GECON. A robustness analysis indicates that other measures of global economic conditions such as Global Weakness Index (GWI) and Global Intensity Index (GII) contain lower forecasting power than GECON but with significant improvements in their forecast outcomes when combined with the latter using the principal components analysis. Consequently, monitoring the global economic dynamics via GECON as well as other indices (GWI and GII) is crucial for optimal investment decisions.

Suggested Citation

  • Afees A. Salisu & Rangan Gupta & Elie Bouri, 2022. "Testing the Forecasting Power of Global Economic Conditions for the Volatility of International REITs using a GARCH-MIDAS Approach," Working Papers 202211, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202211
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    More about this item

    Keywords

    REITs volatility; global economic conditions; mixed data analysis; GARCH-MIDAS model; forecasting;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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