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Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Futures

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  • Chyi Lee

    ()

  • Simon Stevenson

    ()

  • Ming-Long Lee

    ()

Abstract

In 2007 futures contracts were introduced based upon the listed real estate market in Europe. Following their launch they have received increasing attention from property investors, however, few studies have considered the impact their introduction has had. This study considers two key elements. Firstly, a traditional Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model, the approach of Bessembinder & Seguin (1992) and the Gray’s (1996) Markov-switching-GARCH model are used to examine the impact of futures trading on the European real estate securities market. The results show that futures trading did not destabilize the underlying listed market. Importantly, the results also reveal that the introduction of a futures market has improved the speed and quality of information flowing to the spot market. Secondly, we assess the hedging effectiveness of the contracts using two alternative strategies (naïve and Ordinary Least Squares models). The empirical results also show that the contracts are effective hedging instruments, leading to a reduction in risk of 64 %. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Chyi Lee & Simon Stevenson & Ming-Long Lee, 2014. "Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Futures," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 299-322, February.
  • Handle: RePEc:kap:jrefec:v:48:y:2014:i:2:p:299-322
    DOI: 10.1007/s11146-012-9399-3
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    References listed on IDEAS

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    1. John Cotter & Simon Stevenson, 2008. "Modeling Long Memory in REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(3), pages 533-554, September.
    2. S. Wong & C. Yiu & M. Tse & K. Chau, 2006. "Do the Forward Sales of Real Estate Stabilize Spot Prices?," The Journal of Real Estate Finance and Economics, Springer, vol. 32(3), pages 289-304, May.
    3. Figlewski, Stephen, 1981. "Futures Trading and Volatility in the GNMA Market," Journal of Finance, American Finance Association, vol. 36(2), pages 445-456, May.
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    5. 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.
    6. Toshiaki Watanabe, 2001. "Price volatility, trading volume, and market depth: evidence from the Japanese stock index futures market," Applied Financial Economics, Taylor & Francis Journals, vol. 11(6), pages 651-658.
    7. Bessembinder, Hendrik & Seguin, Paul J., 1993. "Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 21-39, March.
    8. Dirk Brounen & Yair Ben-Hamo, 2009. "Calendar Anomalies: The Case of International Property Shares," The Journal of Real Estate Finance and Economics, Springer, vol. 38(2), pages 115-136, February.
    9. Stein, Jeremy C, 1987. "Informational Externalities and Welfare-Reducing Speculation," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1123-1145, December.
    10. Kim Liow, 2009. "Long-term Memory in Volatility: Some Evidence from International Securitized Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 39(4), pages 415-438, November.
    11. Cox, Charles C, 1976. "Futures Trading and Market Information," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1215-1237, December.
    12. Nomikos, Nikos K. & Pouliasis, Panos K., 2011. "Forecasting petroleum futures markets volatility: The role of regimes and market conditions," Energy Economics, Elsevier, vol. 33(2), pages 321-337, March.
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    14. Colin Lizieri & Gianluca Marcato & Paul Ogden & Andrew Baum, 2012. "Pricing Inefficiencies in Private Real Estate Markets Using Total Return Swaps," The Journal of Real Estate Finance and Economics, Springer, vol. 45(3), pages 774-803, October.
    15. Benjamas Jirasakuldech & Robert Campbell & Riza Emekter, 2009. "Conditional Volatility of Equity Real Estate Investment Trust Returns: A Pre- and Post-1993 Comparison," The Journal of Real Estate Finance and Economics, Springer, vol. 38(2), pages 137-154, February.
    16. Kim Liow & Muhammad Ibrahim, 2010. "Volatility Decomposition and Correlation in International Securitized Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 40(2), pages 221-243, February.
    17. Bessembinder, Hendrik & Seguin, Paul J, 1992. " Futures-Trading Activity and Stock Price Volatility," Journal of Finance, American Finance Association, vol. 47(5), pages 2015-2034, December.
    18. Yougou Liang & Michael J. Seiler & Arjun Chatrath, 1998. "Are REIT Returns Hedgeable?," Journal of Real Estate Research, American Real Estate Society, vol. 16(1), pages 87-98.
    19. Martin T. Bohl & Christian A. Salm & Bernd Wilfling, 2011. "Do individual index futures investors destabilize the underlying spot market?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(1), pages 81-101, January.
    20. Figlewski, Stephen, 1984. " Hedging Performance and Basis Risk in Stock Index Futures," Journal of Finance, American Finance Association, vol. 39(3), pages 657-669, July.
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    22. Simon Stevenson, 2000. "International Real Estate Diversification: Empirical Tests using Hedged Indices," Journal of Real Estate Research, American Real Estate Society, vol. 19(1), pages 105-131.
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    Citations

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    Cited by:

    1. Chyi Lin Lee & Ming-Long Lee, 2012. "Do European real estate stocks hedge inflation? Evidence from developed and emerging markets," ERES eres2012_155, European Real Estate Society (ERES).
    2. Zhou, Jian, 2016. "Hedging performance of REIT index futures: A comparison of alternative hedge ratio estimation methods," Economic Modelling, Elsevier, vol. 52(PB), pages 690-698.
    3. repec:kap:jrefec:v:56:y:2018:i:4:d:10.1007_s11146-017-9606-3 is not listed on IDEAS
    4. repec:eme:ijhmap:ijhma-05-2016-0037 is not listed on IDEAS
    5. Chyi Lin Lee & Ming-Long Lee, 2014. "Do European real estate stocks hedge inflation? Evidence from developed and emerging markets," International Journal of Strategic Property Management, Taylor & Francis Journals, vol. 18(2), pages 178-197, June.
    6. Arzu Uluc, 2018. "Stabilising House Prices: the Role of Housing Futures Trading," The Journal of Real Estate Finance and Economics, Springer, vol. 56(4), pages 587-621, May.
    7. repec:eee:foreco:v:28:y:2017:i:c:p:70-79 is not listed on IDEAS

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