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Cointegration and Price Discovery between Equity and Mortgage REITs

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Abstract

This study analyzes the relationship between equity and mortgage real estate investment trust (REIT) stock prices by performing cointegration tests and causality tests, and estimating an error correction model. Evidence is found that a stable long-run linear relationship exists based on their common reactions to changes in market returns, interest rates and other additional factors. Geweke causality test results indicate a causal relationship running from EREIT stock prices to MREIT stock prices. This may reflect the quicker response of equity REIT stock prices to changes including real estate returns. In addition, the results suggest overall linear dependence (total linear causality) and instantaneous linear feedback between changes in EREIT and MREIT stock prices. The results of the error correction model not only indicate a significant increase in the explanatory power of the model compared with the vector autoregression model but also reveals how the price discovery processes in REIT security markets maintain long-run equilibrium.

Suggested Citation

  • Ling T. He, 1998. "Cointegration and Price Discovery between Equity and Mortgage REITs," Journal of Real Estate Research, American Real Estate Society, vol. 16(3), pages 327-338.
  • Handle: RePEc:jre:issued:v:16:n:3:1998:p:327-338
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    1. K.C. Chen & Daniel D. Tzang, 1988. "Interest-Rate Sensitivity of Real Estate Investment Trusts," Journal of Real Estate Research, American Real Estate Society, vol. 3(3), pages 13-22.
    2. David A. Dickey & Dennis W. Jansen & Daniel L. Thornton, 1991. "A primer on cointegration with an application to money and income," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 58-78.
    3. Hsiao, Cheng, 1979. "Causality tests in econometrics," Journal of Economic Dynamics and Control, Elsevier, vol. 1(4), pages 321-346, November.
    4. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    5. Jun Han & Youguo Liang, 1995. "The Historical Performance of Real Estate Investment Trusts," Journal of Real Estate Research, American Real Estate Society, vol. 10(3), pages 235-262.
    6. He, Ling T & Myer, F C Neil & Webb, James R, 1996. "The Sensitivity of Bank Stock Returns to Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 12(2), pages 203-220, March.
    7. Terence Khoo & David Hartzell & Martin Hoesli, 1993. "An Investigation of the Change in Real Estate Investment Trust Betas," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(2), pages 107-130.
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    Cited by:

    1. John Cotter & Simon Stevenson, 2006. "Multivariate Modeling of Daily REIT Volatility," The Journal of Real Estate Finance and Economics, Springer, vol. 32(3), pages 305-325, May.
    2. Cotter, John & Stevenson, Simon, 2004. "Uncovering Volatility Dynamics in Daily REIT Returns," MPRA Paper 3533, University Library of Munich, Germany, revised 2005.
    3. Lee, Chien-Chiang & Lee, Cheng-Feng & Lee, Chi-Chuan, 2014. "Asymmetric dynamics in REIT prices: Further evidence based on quantile regression analysis," Economic Modelling, Elsevier, vol. 42(C), pages 29-37.
    4. John G. Gallo & Larry J. Lockwood & Ying Zhang, 2013. "Structuring Global Property Portfolios: A Cointegration Approach," Journal of Real Estate Research, American Real Estate Society, vol. 35(1), pages 53-82.
    5. Kim Hiang Liow, 2006. "Dynamic relationship between stock and property markets," Applied Financial Economics, Taylor & Francis Journals, vol. 16(5), pages 371-376.
    6. repec:kap:jrefec:v:56:y:2018:i:2:d:10.1007_s11146-017-9601-8 is not listed on IDEAS
    7. Kyriaki Begiazi & Dimitrios Asteriou & Keith Pilbeam, 2016. "A multivariate analysis of United States and global real estate investment trusts," International Economics and Economic Policy, Springer, vol. 13(3), pages 467-482, July.
    8. repec:ire:issued:v:20:n:03:2017:p:287-324 is not listed on IDEAS

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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