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Nonlinear Return Dependence in Major Real Estate Markets

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  • Kim Hiang Liow
  • James R. Webb

Abstract

The major contribution of this paper is to recognize the possible presence of nonlinear return dependence in six major real estate markets (the US, UK, Japan, Australia, Hong Kong and Singapore) as well the resulting implications on return predictability and market interdependence. We employ the Brock, Derchert & Scheinkman (BDS) test and a nonlinear logistic model to analyse the temporal variation of securitized and hedged market returns in these markets using unconditional and conditional risk‐return specifications. Our results do not imply conclusively the existence of deterministic nonlinear return behaviour in these markets but are consistent with its existence in some cases. Further evidence of varying levels of market co‐movement among the major real estate markets as well as with the Morgan Stanley Capital International (MSCI) world stock market is documented for these series after accounting for the deterministic nonlinearities in self returns. The analyses also suggest a need to account for nonlinear behaviour in forecasting models in order to obtain potentially more accurate real estate return forecasts. Finally, global investors need to be more cautious in formulating their portfolio diversification strategies since gains from diversification may diminish in the long run if real estate markets are in fact nonlinear in an international environment.

Suggested Citation

  • Kim Hiang Liow & James R. Webb, 2008. "Nonlinear Return Dependence in Major Real Estate Markets," Journal of Property Research, Taylor & Francis Journals, vol. 25(4), pages 285-319, December.
    • Handle: RePEc:taf:jpropr:v:25:y:2008:i:4:p:285-319
    DOI: 10.1080/09599910902837036
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    References listed on IDEAS

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