Ming-Long Lee

Hedging effectiveness of REIT futures

Purpose - The hedging effectiveness of real estate investment trust (REIT) futures as a critical issue in response to the global REIT market has been extremely volatile in recent years, however few studies have been placed on this area. This study aims to fill in this gap and examine the hedging effectiveness of Australian and Japanese REIT futures over 2002-2010. Design/methodology/approach - The analysis of this study involves two stages. The first stage is to estimate optimal hedge ratios. A variety of hedging methods is employed, including a traditional hedge, an ordinary least squares (OLS) model and a bivariate GARCH model. Thereafter, the hedging effectiveness of these strategies is assessed individually. Findings - The empirical results show REIT futures are effective hedging instruments in which a risk reduction of 37 per cent-78 per cent (34 per cent-52 per cent) for Australian (Japanese) REITs is evident. Importantly, the results also reveal that REIT futures outperform other hedging instruments in which a weaker risk reduction is found by stock, interest rate and foreign currency futures contracts. Moreover, the hedging effectiveness of REIT futures is dynamic and varies over time. Practical implications - The findings enable more informed and practical investment decision-making regarding the role of REIT futures in risk management. Originality/value - This paper, as far as the authors are aware, is the first study to offer empirical evidence of the risk-reduction effectiveness of REIT futures. The hedging effectiveness of REIT futures is also compared to other hedging instruments for the first time.

Price linkages between Australian housing and stock markets: Wealth effect, credit effect or capital switching?

Purpose n n n n nThe purpose of this study is to examine the linkages between Australian house prices and stock prices under the Toda and Yamamoto test framework. Specifically, it investigated whether there is a capital switching effect between house prices and stock prices. n n n n nDesign/methodology/approach n n n n nThis study examined the linkages between house prices and stock prices under the Toda and Yamamoto test framework. To accommodate the impact of the global financial crisis (GFC), a sub-period analysis was undertaken. To assess the impact of investor structure, the tests were also performed for small cap stocks and large cap stocks individually. n n n n nFindings n n n n nThe empirical results reveal a negative lead–lag relationship between house prices and stock prices in Australia, suggesting the existence of capital switching activities between housing and stocks. The impact of the GFC on the lead–lag relationship between house prices and stock prices is also documented. Before the crisis, a causality transmission was running from house prices to stock prices, whilst stock prices appeared to lead house prices after the crisis. The capital switching activities between housing and stocks are more evident for small cap stocks. n n n n nOriginality/value n n n n nThis study is the first to examine the linkages between house prices and stock prices under the Toda and Yamamoto test framework. This is the first study to explore the impacts of the GFC on the lead–lag relationship between the two asset prices under the capital switching framework. This study is also the first to provide empirical evidence regarding the existence of capital switching activities between housing and stocks. In addition, the impact of investor structure on the interrelationship between the two asset prices is examined for the first time under the capital switching framework.

Price discovery and volatility transmission in Australian REIT cash and futures markets

This study examines the price discovery function and volatility spillovers in australian real estate investment trust (A-REIT) index futures and also investigates the effects of the global fi- nancial crisis (gfc) on these two features. as opposed to the general understanding of the relationship between the cash and the futures markets, the current study finds that the A-REIT cash market led the a-reIt futures market in price discovery and volatility transmission processes before the gfc. However, during the GFC, the two markets interacted bilaterally in terms of information flow, i.e., in- formation flowed in both directions. Furthermore, after the GFC, the futures market followed the cash market again, but less closely. These findings have broad implications for investors in property assets.

Low-frequency volatility of real estate securities and macroeconomic risk

Real estate securities have distinct characteristics that differentiate them from stocks generally. Key amongst them is that underpinning the firms are both real and investment assets. Therefore, the connections between the underlying macroeconomy and listed real estate firms are of heightened importance. To consider the linkages with macroeconomic fundamentals, we extract the ‘low‐frequency’ volatility component from aggregate volatility shocks in 11 international securitised real estate markets using Engle and Rangels (2008) Spline‐GARCH model. The analysis reveals that the low‐frequency volatility of real estate securities has strong and positive association with most of the macroeconomic risk proxies examined. Differences between real estate securities and common stocks have also been identified.