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Random Walks and Market Efficiency: Evidence from International Real Estate Markets

  • Robert T. Kleiman


    (York University, Toronto, Ontario M3J 1P3)

  • James E. Payne


    (Eastern Kentucky University, Richmond, KY 40475)

  • Anandi P. Sahu


    (Oakland University, Rochester, MI 48309)

This study performs tests of the random walk hypothesis for international commercial real estate markets utilizing stock market indices of real estate share prices for three geographical regions: Europe, Asia and North America. The augmented Dickey-Fuller and Phillips-Perron unit root tests and Cochrane variance ratio test find that each of these markets (as well as associated broader stock markets) exhibits random walk behavior. Moreover, a non-parametric runs test provides support for weak-form market efficiency in the real estate markets. In addition, Johansen-Juselius co-integration analysis reveals that all three markets appear co-integrated and share a common long-run stochastic trend. Results of co-integration analyses and vector error correction models suggest that diversification benefits through international real estate securities can only be achieved in the short run.

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Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

Volume (Year): 24 (2002)
Issue (Month): 3 ()
Pages: 279-298

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Handle: RePEc:jre:issued:v:24:n:3:2002:p:279-298
Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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  1. Graeme Newell & James R. Webb, 1996. "Assessing Risk for International Real Estate Investments," Journal of Real Estate Research, American Real Estate Society, vol. 11(2), pages 103-116.
  2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  3. Sephton, Peter S. & Larsen, Hans K., 1991. "Tests of exchange market efficiency: fragile evidence from cointegration tests," Journal of International Money and Finance, Elsevier, vol. 10(4), pages 561-570, December.
  4. Bradford Case & William N. Goetzmann & K. Geert Rouwenhorst, 2000. "Global Real Estate Markets - Cycles and Fundamentals," NBER Working Papers 7566, National Bureau of Economic Research, Inc.
  5. James G. MacKinnon, 2010. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
  6. Mankiw, N. Gregory & Campbell, John, 1987. "Permanent and Transitory Components in Macroeconomic Fluctuations," Scholarly Articles 3207697, Harvard University Department of Economics.
  7. LeRoy, Stephen F, 1989. "Efficient Capital Markets and Martingales," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1583-1621, December.
  8. Anthony J. Richards, 1996. "Comovements in National Stock Market Returns: Evidence of Predictability But Not Cointegration," IMF Working Papers 96/28, International Monetary Fund.
  9. Jorge L. Urrutia, 1995. "Tests Of Random Walk And Market Efficiency For Latin American Emerging Equity Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(3), pages 299-309, 09.
  10. Pesaran, M. H. & Smith, Ron P., 1998. "Structural Analysis of Cointegrating VARs," Cambridge Working Papers in Economics 9811, Faculty of Economics, University of Cambridge.
  11. James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
  12. M. Hashem Pesaran & Ron P. Smith, 1998. "Structural Analysis of Cointegrating VARs," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 471-505, December.
  13. Dwyer, Gerald Jr. & Wallace, Myles S., 1992. "Cointegration and market efficiency," Journal of International Money and Finance, Elsevier, vol. 11(4), pages 318-327, August.
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