Simon Stevenson

House price diffusion and inter‐regional and cross‐border house price dynamics

This paper examines house price diffusion with the Republic of Ireland and between the Republic and Northern Ireland. The results show that a large degree of diffusion takes place, particularly from Dublin to the other regions, in a manner that is similar and consistent with the UK ripple effect. The results would also support previous evidence that the boom in the Irish housing market in the late 1990s was more evident and led by movements in the Dublin market. Evidence of the importance of contiguous and non‐contiguous areas is also evident beyond the Dublin effect. The results would also appear to support the view that the Northern Irish market is more linked with the housing market in the Republic than with the rest of the UK.

Monetary Shocks and REIT Returns

We investigate the influence of unanticipated changes in US monetary policy on Equity Real Estate Investment Trusts (REIT’s). Although a number of studies have investigated the issue of interest rate changes, the effect of unanticipated changes has not previously been addressed in terms of possible effects on both REIT’s returns and volatility. The results show a strong response in both the first and second moments of REIT returns to unexpected policy rate changes. The results for the impact of the shock on both mean and volatility of returns is consistent with results from studies addressing broader equity markets. However, we find evidence both against behavioral changes in volatility coincident to US monetary policy decisions and asymmetric responses to the monetary policy shock.

Modeling Housing Market Fundamentals: Empirical Evidence of Extreme Market Conditions

This article examines the issues encountered in the modeling of market fundamentals during a period of extreme price behavior. The study analyzes the price behavior of the residential property market in Ireland using a number of alternative methodological approaches in the estimation of fundamental market value. Limitations in conventional models such as an inverted demand model are highlighted, in particular, with regard to diagnostic concerns and the static nature of the model. The use of an error correction framework provides more consistent and robust findings. The analysis does appear to indicate that a substantial premium over fundamental values developed in the Irish market during the late 1990s, reaching a peak in 1999 and 2000. However, in recent years, prices have largely been in line with fundamentals.

The Linkages Between Real Estate Securities in the Asia-Pacific

Abstract This paper investigates the inter-relationships between real estate securities markets in Australia, Hong Kong, Japan, and Singapore. Two key issues are addressed, namely whether the markets are related in the short-term and secondly, whether short-run co-movement occurs bеtwееп the markets on a weekly basis. The long-term analysis finds minimal evidence of cointegration between the markets, indicating that they do not share long-term trends. This implies long-term diversification opportunities. The short-term analysis of causal relationships and volatility spillovers also provides evidence of minimal co-movement. The primary piece of dissenting evidence is that consistent evidence of Granger Causality is found when contemporaneous observations are included.

Emerging markets, downside risk and the asset allocation decision

Abstract This study examines the use of downside risk measures in the construction of an optimal international portfolio, with particular reference to the estimated allocations in emerging markets and the out-of-sample performance of the optimal portfolios. The use of downside risk measures is assessed due to the problems of using a conventional mean-variance analysis approach in the presence of the non-normality often found to be present in emerging market data. The data set used consists of the MSCI indices for developed equity markets and the IFC data set on emerging markets. The primary component of the paper consists of the construction of optimal portfolios under both mean-variance and downside risk frameworks. In addition, the use of Bayes–Stein estimators is also assessed, in an attempt to reduce estimation error. The resulting estimated allocations are then used to assess the out-of-sample performance of the optimal portfolios. The results indicate that for risk-averse investors the use of downside risk measures can result in significant improvements in performance.

Uncovering Volatility Dynamics in Daily Reit Returns

Using a time-varying approach, this paper examines the dynamics of volatility in the REIT sector. The results highlight the attractiveness and suitability of using GARCH based approaches in the modeling of daily REIT volatility. The paper examines the influencing factors on REIT volatility, documenting the return and volatility linkages between REIT sub-sectors and also examines the influence of other US equity series. The results contrast with previous studies of monthly REIT volatility. Linkages within the REIT sector and with related sectors such as value stocks are diminished, while the general influence of market sentiment, coming through the large cap indices is enhanced. This would indicate that on a daily basis general market sentiment plays a more fundamental role than more intuitive relationships within the capital markets.

Testing the statistical significance of sector and regional diversification

Purpose – The question as to whether it is better to diversify a real estate portfolio within a property type across the regions or within a region across the property types is one of continuing interest for academics and practitioners alike. However, this study is somewhat different from the usual sector/regional analysis in that this study is designed to investigate whether a real estate fund manager can obtain a statistically significant improvement in risk/return performance from extending out of a London based portfolio into firstly the rest of the South East of England and then into the remainder of the UK, or whether the manger would be better off staying within London and diversifying across the various property types.Design/methodology/approach – In order to examine these issues we form a number of portfolios that can be directly compared to a number of benchmark portfolios, as well as to each other. Then using the statistical tests developed by Gibbons et al. and Jobson and Korkie, we investigat...

A comparison of the forecasting ability of ARIMA models

– ARIMA models have been extensively examined in the context of the real estate market. The purpose of this paper is to examine issues relating to their application in a forecasting context. Specifically, the paper seeks to examine whether in‐sample measures of best‐fit and also past forecasting accuracy bear any relation to future forecasting performance., – The forecasting performance of alternative ARIMA specifications are compared over rolling estimation and forecasting windows. The forecasting accuracy of the alternative specifications is compared with specific attention placed on the accuracy of the respective specification that in‐sample provides the best fitting model., – The results highlight the limitations in using the conventional approach to identifying the best‐specified ARIMA model in sample, when the purpose of the analysis is to provide forecasts. The results show that while ARIMA models can be useful in anticipating broad market trends, there are substantial differences in the forecasts obtained using alternative specifications. The use of conventional measures of best‐fit provide little indication as to future forecasting ability, nor does the forecasting performance of a specification in previous periods., – ARIMA modelling has frequently been highlighted as a useful forecasting approach. This paper illustrates that care needs to be paid in their use in a forecasting context and full appreciation of the strengths and limitations of the ARIMA approach.

Real estate portfolio construction and estimation risk

The use of MPT in the construction real estate portfolios has two serious limitations when used in an ex-ante framework: (1) the intertemporal instability of the portfolio weights and (2) the sharp deterioration in performance of the optimal portfolios outside the sample period used to estimate asset mean returns. Both problems can be traced to wide fluctuations in sample means Jorion (1985). Thus the use of a procedure that ignores the estimation risk due to the uncertain in mean returns is likely to produce sub-optimal results in subsequent periods. This suggests that the consideration of the issue of estimation risk is crucial in the use of MPT in developing a successful real estate portfolio strategy. Therefore, following Eun & Resnick (1988), this study extends previous ex-ante based studies by evaluating optimal portfolio allocations in subsequent test periods by using methods that have been proposed to reduce the effect of measurement error on optimal portfolio allocations.

Constraining optimal portfolios and the effect on real estate’s allocation

This paper re‐examines the role of real estate within mixed asset portfolios from the perspective of an Irish portfolio manager. The nature of the investment market in the Republic of Ireland leads to the study extending the existing literature by expanding the universe of assets beyond a solely domestic setting and by imposing constraints on the optimal portfolios. Irish funds generally hold proportionately more in international equities than in the domestic market due to the small and illiquid nature of the Irish market; therefore, unconstrained tests do not adequately model the behaviour of Irish portfolio managers. The study finds that while real estate plays an important role in both the domestic and international unconstrained portfolios, it exits the optimal portfolios at relatively low return levels. Additionally, the real estate series adjusted for smoothing fails to enter any of the optimal portfolios. However, the use of 20 per cent band constraints leads to an increase in the diversification role real estate can play in a mixed asset portfolio, with the asset maintaining a presence up to more acceptable return levels.