This paper uses a regime-switching approach to determine whether prices in the US stock, direct real estate and indirect real estate markets are driven by the presence of speculative bubbles. The results show significant evidence of the existence of periodically partially collapsing speculative bubbles in all three markets. A multivariate bubble model is then developed and implemented to evaluate whether the stock and real estate bubbles spill over into REITs. The underlying stock market bubble is found to be a stronger influence on the securitised real estate market bubble than that of the property market. Furthermore, the findings suggest a transmission of speculative bubbles from the direct real estate to the stock market, although this link is not present for the returns themselves.
Get full access to this article
View all access options for this article.
References
1.
AndersonK.BrooksC.KatsarisA. (2010) Speculative bubbles in the S&P 500: was the tech bubble confined to the tech sector?, Journal of Empirical Finance, 17(3), pp. 345–361.
2.
BarkhamR.GeltnerD. (1995) Price discovery in American and British property markets, Real Estate Economics, 23, pp. 21–44.
3.
BlanchardO. J. (1979) Speculative bubbles, crashes and rational expectations, Economics Letters, 3, pp. 387–389.
4.
BlanchardO. J.WatsonM. W. (1982) Bubbles, rational expectations and financial markets, in: WachtelP. (Ed.) Crisis in the Economic and Financial Structure, pp. 295–315. Lexington, MA: Lexington.
5.
BrooksC.KatsarisA. (2005a) Trading rules from forecasting the collapse of speculative bubbles for the S&P 500 composite index, Journal of Business, 78(5), pp. 2003–2036.
6.
BrooksC.KatsarisA. (2005b) A three-regime model of speculative behaviour: modelling the evolution of bubbles in the S&P 500 composite index, Economic Journal, 115, pp. 767–797.
7.
BrooksC.KatsarisA.McGoughT.TsolacosS. (2001) Testing for bubbles in indirect property price cycles, Journal of Property Research, 18, pp. 1–19.
8.
BrounenD.EichholtzP. (2003) Property, common stock and property shares, Journal of Portfolio Management, 28(3), pp. 129–137.
9.
ChanS. H.LeungW. K.WangK. (1998) Institutional investment in REITs: evidence and implications, Journal of Real Estate Research, 16, pp. 357–374.
10.
ClaytonJ.MacKinnonG. (2003) The relative importance of stock, bond and real estate factors in explaining REIT returns, Journal of Real Estate Finance and Economics, 27(1), pp. 39–60.
11.
DavisM. A.LehnertA.RobertF. M. (2008) The rent–price ratio for the aggregate stock of owner-occupied housing, Review of Income and Wealth, 54(2), pp. 279–284.
12.
EvansG. (1991) Pitfalls in testing for explosive bubbles in asset prices, American Economic Review, 81, pp. 922–930.
13.
EwingB. T.PayneJ. E. (2005) The response of real estate investment trust returns to macroeconomic shocks, Journal of Business Research, 58(3), pp. 293–300.
14.
FisherJ.GeltnerD.WebbB. (1994) Value indices of commercial real estate: a comparison of index construction methods, Journal of Real Estate Finance and Economics, 9(2), pp. 137–164.
15.
GeltnerD. (1993) Estimating market values from appraised values without assuming market efficiency, Journal of Real Estate Research, 8(3), pp. 325–346.
16.
GeltnerD.MacGregorB. D.SchwannG. M. (2003) Appraisal smoothing and price discovery in real estate markets, Urban Studies, 40(5/6), pp. 1047–1064.
17.
GhoshC.GutteryR. S.SirmansC. F. (1998) Contagion and REIT stock prices, Journal of Real Estate Research, 16(3), pp. 389–400.
18.
GilibertoS. M. (1990) Equity real estate investment trusts and real estate returns, Journal of Real Estate Research, 5, pp. 259–264.
19.
GlascockJ.LuC.SoR. (2000) Further evidence on the integration of REIT, bond and stock returns, Journal of Real Estate Finance and Economics, 20, pp. 177–194.
20.
GoetzmannW. N.IbbotsonR. G. (1990) The performance of real estate as an asset class, Journal of Applied Corporate Finance, 3, pp. 65–76.
21.
GyourkoJ.KeimD. B. (1992) What does the stock market tell us about real estate returns?, Journal of the American Real Estate and Urban Economics Association, 20, pp. 457–485.
22.
GyourkoJ.KeimD. B. (1993) Risk and return in real estate: evidence from a real estate stock index, Financial Analysts Journal, 49, pp. 39–46.
23.
HanJ.HanQ. (1991) The return-generating process for real estate investment trusts. Working paper, Massachusetts Institute of Technology.
24.
HendershottP. H.HendershottR. J.WardC. W. R. (2003) Corporate equity and commercial property market ‘bubbles’, Urban Studies, 40(5/6), pp. 993–1009.
25.
JirasakuldechB.CampbellR.KnightJ. (2006) Are there rational speculative bubbles in REITs?, Journal of Real Estate Finance and Economics, 32, pp. 105–107.
26.
LaiR. N.OrderR. A. van (2010) Momentum and house price growth in the United States: anatomy of a bubble, Real Estate Economics, 38, pp. 753–773.
27.
LaopodisN. (2009) REITs, the stock market and economic activity, Journal of Property Investment and Finance, 27, pp. 563–578.
28.
LeeM.-L.ChiangK. (2010) Long-run price behaviour of equity REITs: become more like common stocks after the early 1990s?, Journal of Property Investment & Finance, 28(6), pp. 454–465.
29.
LiuC.MeiJ. (1992) The predictability of returns on equity REITs and their co-movement with other assets, Journal of Real Estate Finance and Economics, 5, pp. 401–418.
30.
NordenS. vanSchallerH. (1993) The predictability of stock market regime: evidence from the Toronto Stock Exchange, Review of Economics and Statistics, 75(3), pp. 505–510.
31.
NordenS. vanSchallerH. (1999) Speculative behaviour, regime-switching, and stock market crashes, in: RothmanP. (Ed.) Nonlinear Time Series Analysis of Economic and Financial Data, pp. 321–356. New York: Springer.
32.
OkunevJ.WilsonP. (1997) Using nonlinear tests to examine integration between real estate stock markets, Real Estate Economics, 25(3), pp. 487–503.
33.
OkunevJ.WilsonP.ZurbrueggR. (2000) The causal relationship between real estate and stock markets, Journal of Real Estate Finance and Economics, 21, pp. 251–261.
34.
PayneJ.WatersG. (2007) Have equity REITs experienced periodically collapsing bubbles?, Journal of Real Estate Finance and Economics, 34(2), pp. 207–224.
35.
RocheM. J. (2001) The rise in house prices in Dublin: bubble, fad or just fundamentals, Economic Modelling, 18, pp. 281–295.
36.
SeilerM. J.WebbJ. R.MyerF. C. N. (1999) Are EREITs real estate?, Journal of Real Estate Portfolio Management, 5(2), pp. 171–182.
37.
SimonS.NgW. L. (2009) The effect of the real estate downturn on the link between REITs and the stock market, Journal of Real Estate Portfolio Management, 15, pp. 211–219.
38.
XiaoQ. (2010) Crashes in real estate prices: causes and predictability, Urban Studies, 47(8), pp. 1725–1744.
39.
XiaoQ.TanG. K. R. (2007) Signal extraction with Kalman filter: a study of the Hong Kong property price bubbles, Urban Studies, 44(4), pp. 865–888.
