Exploring a Three-Factor Dependence Structure of Conditional Volatilities: Some Quantile Regression Evidence from Real Estate Investment Trusts

Round 1

Reviewer 1 Report

JRFM: Exploring a Three-Factor Dependence Structure of Conditional Volatilities: Some Quantile Regression Evidence from Real Estate Investment Trusts

In this paper, the authors propose a three-factor pricing model, consisting of local stock market index, global REIT market index, and global stock market index, to examine the dependence structure of conditional volatilities of real estate investment trust (REIT) market from 11 countries. Using data from 1st June 2008 to 30th April 2021 and quantile regressions, the results show the following: there is a simultaneous dependence between each REIT market and local stock, global REIT market and global stock market. The dependence between the REIT and the three factors is positive and significant for every part of the quantiles. Asia-Pacific REIT markets have consistently higher average degree of dependence with their local stock markets than with the global stock and global REIT markets. Conversely, European REIT markets are generally more globally integrated. Furthermore, the results show that REITs display an asymmetric co-movement with at least one of the three factors as the degree of dependence increases when these markets are booming but dependence level declines when the markets are bearish.

I like the idea of the paper, it is relevant and appealing and has implications for many economic actors, especially given that the applied methods are simple yet suitable.  My comments are as follows:

1- In the introduction section, the authors should spend more ink to better motivate the study and explain their added value compared to the existing literature.

2-         I would have liked to see how the empirical analysis and the key empirical findings presented in this paper are related to findings from the following papers: “Quantile causality between banking stock and real estate securities returns in the US. Quarterly Review of Economics and Finance, Vol. 78, pp. 251-260; Co-movement across European stock and real estate markets. International Review of Economics and Finance, Vol. 69, pp. 189–208; Mortgage Default Risks and High-Frequency Predictability of the US Housing Market:  A Reconsideration . Journal of Real Estate Portfolio Management, Vol. 26 No. 2, pp. 111-117; On the dynamics of international real estate investment trust propagation mechanisms: Evidence from time-varying return and volatility connectedness measures. Entropy, Vol. 23 No. 8, 1048.:”. This is important as these studies not only indicate evidence of significant relationship various REIT markets but between REIT and stock markets and some indicates a quantile-dependence. This would help the authors add more value to the analyses and make it more susceptible to citations from the rising literature on the appealing REIT markets and the other markets that can affect them. .

3- Try to add more economic intuition of the results, maybe regarding the efficiency/inefficiency of the REIT markets. Furthermore, consider the discussion of results in light of the existing literature.

5- More explanations and justifications are needed regarding the following: “  One possible explanation for this regional difference is that some European stock markets such as FR/UK/GE/IT have higher correlations with the global stock market because of the impact of geographical proximity on market integration. Consequently, their REIT markets are more ready to attract regional and international investors to their real estate equity and debt investment instruments, in an era of increasing globalization and real estate asset securitization. However, they still need longer time to grow domestically due to their respective younger ages of establishment”.

6-         In the conclusion section, a more detailed discussion of the policy implications would make the paper richer and more informative for investors, and policymakers. Also, consider describing the study limitations and scope for future research. In this regard, it would be interesting to point to the possibility of applying four or five factor models

7-Make tables more self-explanatory.

Author Response

1. In the introduction section, the authors should spend more ink to better motivate the study and explain their added value compared to the existing literature

Response: Thank you for your comments. The “introduction” section was rewritten/reorganized to reflect better motivation and explain their added value to the literature. Hope that is acceptable to you. Thank you once again.

2- I would have liked to see how the empirical analysis and tcommenthe key empirical findings presented in this paper are related to findings from the following papers: “Quantile causality between banking stock and real estate securities returns in the US. Quarterly Review o               Economics and Finance, Vol. 78, pp. 251-260; Co-movement across European stock and real estate markets. International Review of Economics and Finance, Vol. 69, pp. 189–208; Mortgage Default Risks and High-Frequency Predictability of the US Housing Market:  A Reconsideration . Journal of Real Estate Portfolio Management, Vol. 26 No. 2, pp. 111-117; On the dynamics of international real estate investment trust propagation mechanisms: Evidence from time-varying return and volatility connectedness measures. Entropy, Vol. 23 No. 8, 1048.:”. This is important as these studies not only indicate evidence of significant relationship various REIT markets but between REIT and stock markets and some indicates a quantile-dependence. This would help the authors add more value to the analyses and make it more susceptible to citations from the rising literature on the appealing REIT markets and the other markets that can affect them. .

Response: Thank you.

• A new section, Section 2 was created in this revision to accommodate this requirement
• Please read the entire new Section 2. This issue was similarly raised by Reviewer 1 (see above)
• The original reference list was also expanded with these studies included

3- Try to add more economic intuition of the results, maybe regarding the efficiency/inefficiency of the REIT markets. Furthermore, consider the discussion of results in light of the existing literature.

Response: Thank you for your suggestion. Please read Section 4 (Results and discussion),1^st paragraph, “………..major factors. Thus, in consistent with the existing literature discussed above, we have identified at least a strong volatility interdependence relationship between national REITs markets and the three major market factors. Intuitively, the results may also imply a degree of market inefficiency in the sense that nonlinear volatility information from one or more of the three major market factors can be used to forecast volatility changes in some REIT markets. Following the efficient market hypothesis (EMH), there should not be any nonlinear volatility relationship between a specific national REIT market and the three influential factors.  Therefore, the quantile regression results imply that the REIT markets and the three major market factors are relatively inefficient in their conditional second moment measures.” We sincerely hope our response is acceptable to you.

5- More explanations and justifications are needed regarding the following: “  One possible explanation for this regional difference is that some European stock markets such as FR/UK/GE/IT have higher correlations with the global stock market because of the impact of geographical proximity on market integration. Consequently, their REIT markets are more ready to attract regional and international investors to their real estate equity and debt investment instruments, in an era of increasing globalization and real estate asset securitization. However, they still need longer to grow domestically due to their respective younger ages of establishment”.

Response: Thank you for your suggestion. Please read Section 4 (Results and discussion), 8^th paragraph “…to the global stock market. One possible explanation for this detected regional difference is that some European stock markets such as FR/UK/GE/IT have higher correlations with the global stock market because of the impact of geographical proximity on market integration although developed Europe accounted for only around 13.75% of the global market as of February 2017 (Moss, 2018). This trend of absolute growth (from US$50 billion to US$200 million) and relative decline in global market share reflects improving direct property market values ex. GFC and some equity issuance, which has been somewhat overshadowed by growth in the US market.  These Europe REIT markets are more ready to attract regional and international investors to their real estate equity and debt investment instruments, in an era of increasing globalization and real estate asset securitization. However, they still need longer time to grow domestically due to their respective younger ages of establishment (such as Italy and Germany).[1] Overall, we expect that the average REITs volatility interdependence effect with the global stock market to be fluctuating intermittently in the short run, but are cautiously optimistic that the long-run effect is to be consistently higher than the local stock market in years to come (with global REIT market bridges between global stock and local stock) for the European economies, as several national REIT markets (such as UK/FR/GE) will become more matured and globally integrated…………….” We sincerely hope our response is acceptable to you.

6- In the conclusion section, a more detailed discussion of the policy implications would make the paper richer and more informative for investors, and policymakers. Also, consider describing the study limitations and scope for future research.

Response: Thank you for your suggestions.

(a) Please read Section 5 “Conclusion”,1^st paragraph, “……….QR methodology on a simultaneous three-factor model. Modelling dependence between established REIT markets and the three major market factors is of great importance for the market participants (investors and policy makers) as the obtained results can be used to make important portfolio allocation decision, especially for those established REITs which need to go “international” at some points to support continuing corporate growth and dividends payment to unitholders. Historically, almost all REIT markets were initially established and developed locally (horizontal development) and were therefore closely connected to local economic conditions (horizontal integration). Then they need to acquire and invest in international property holdings (via vertical development and integration) to continue to grow. An interesting question emerging from this process is the mechanism by which REIT market volatilities are connected globally, perhaps through some important connections/spillovers in the REITs’ cash flow, market growth or discount rate as the markets are more integrated. This paper contributes to understanding how global markets (both global REITs and the global stocks) integration are related to this important market connectedness question.” We sincerely hope this response is acceptable to you.

(b) Please read Section 5 “Conclusion”, 3rd paragraph, “………This evidence of dependence across the three influential factors and REIT markets……… risk management and dynamic linkages in the global economy. This research is particularly helpful for portfolio risk management, policy makers, financial institutions and international investors who should be cautious about making investments in simultaneous REIT and common stock markets that display pure contagion. Cognizance of dependencies of the REITs markets is crucial for policy makers to discern the directions of the REIT-common stock comovement and to safeguard the REIT markets from contagion during future crises or major events while at the same time able to strike a balance with market growth.” We sincerely hope this response is acceptable to you.

(c) Please read Section 5 “Conclusion”, 4th paragraph, “In this regard, some important future extension of work involves modelling of portfolio benefits of diversification and extreme risk management across the individual REIT markets in the context of asset pricing/market integration. One last possible research avenue involves exploring the appropriate structure and optimal level of overall interdependence between REIT markets at both the regional and global levels due to increasing REIT market maturity over time. This is because excessive integration could inadvertently facilitate contagion while inadequate integration does not contribute to REIT market growth (Parker, 2018). Pending expanded development and maturity of this younger asset class in several countries,  with a larger REIT sample, it would be interesting to extend the present “three-factor” research to a “four/ five-factors” study of time-varying dependence structure governed by the following specification: REITs (dependence structure) =f (local stock, global REIT, global stock market, global EPU (global economic policy uncertainly), global interest rate), We shall leave this integration/contagion issue for future work.[2] We sincerely hope that you can accept this response.

7- Make tables more self-explanatory.

Response: We followed your advice, went through carefully the five Tables and asarydded in extra explanations wherever necessary. We sincerely hope that you can accept all the 5 Tables. Thank you very much.

[1] Remember that the US REIT market took much longer time to grow horizontally, as well as vertically in order to maintain and improve competitive advantage over other regional and national REIT markets.

[2] We sincerely thank the reviewer for proposing this constructive suggestion to conclude the paper.

Reviewer 2 Report

Exploring a Three-Factor Dependence Structure of Conditional Volatilities: Some Quantile Regression Evidence from Real Estate Investment Trusts

This paper investigates the dependence structure between 11 national real estate investment trust (REIT) markets and local stock, global REIT and global stock using the Quantile Regression methodology on a simultaneous three-factor model. The main element of novelty is represented by the use of this methodology which allows capturing a non-linear response. Correspondingly, the results for each particular market can be considered useful and novel, although there are significant differences between various markets.

In general, I find the paper to be logical and coherent, the methodology is well described, its use justified, and the empirical analysis seems to be well executed. Also, the research questions are clearly defined and answered.

I can think of two areas of improvement of this paper.

First, although the actual results represent an interesting element per se, a lot of heterogeneity between markets seems to be present. I think it if be useful for the conclusions to be drawn for these different cases and with more explanations provided. For instance, in the conclusions part the authors say „The obtained results provide great implications to established REIT markets/ firms which need to go “international” at some points to support continuing corporate growth and dividends payment to unitholders”. More details would be welcomed here. The same need for more explanations can be found also in „This evidence of dependence across the three influential factors and REIT markets provides meaningful insights into REIT market growth, international asset pricing, risk management and dynamic linkages in the global economy.” These insights should be detailed.

Second, the references mentioned in the paper are not very numerous. If there aren’t that many studies related to REIT perhaps there could be relevant studies related to the dependence between other areas of the financial market and the local and global stock markets. Also, the mechanism/reasons behind these dependences could be of interest.

Overall, the results are interesting and the paper is of good quality.

Author Response

1. “……The obtained results provide great implications to established REIT markets/ firms which need to go “international” at some points to support continuing corporate growth and dividends payment to unitholders”. More details would be welcomed here. The same need for more explanations can be found also in „This evidence of dependence across the three influential factors and REIT markets provides meaningful insights into REIT market growth, international asset pricing, risk management and dynamic linkages in the global economy.” These insights should be detailed.”

Response:

(a) Thank you. Done. Please read Section 6 “Conclusion”, paragraph for the new write up, “The obtained results ……….payment to unitholders. Almost all REIT markets were initially developed locally (horizontal development) and were therefore closely connected to local economic conditions (horizontal). Then they need to acquire and invest in international property holdings (via vertical development and integration) to continue to grow. An interesting question emerging from this process is the mechanism by which REIT market volatilities are connected globally, perhaps through some important connections/spillovers in the REITs’ cash flow, market growth or discount rate as the markets are more integrated. This paper contributes to understanding how global markets (both global REITs and the global stocks) integration are related to this important market connectedness question.”

(b) Thank you.  Done. Please read Section 6 “Conclusion”, last paragraph for the new write-up, “This evidence of dependence across the ………….dynamic linkages in the global economy. In this regard, some important future extension of work involves modelling of portfolio benefits of diversification and extreme risk management across the individual REIT markets in the context of asset pricing/market integration. One last possible research avenue involves exploring the appropriate structure and optimal level of overall interdependence between REIT markets at both the regional and global levels due to increasing REIT market maturity over time. This is because excessive integration could inadvertently facilitate contagion while inadequate integration does not contribute to REIT market growth (Parker, 2018). Pending expanded development and maturity of this younger asset class in several countries,  with a larger REIT sample, it would be interesting to extend the present “three-factor” research to a “four/ five-factors” study of time-varying dependence structure governed by the following specification: REITs (dependence structure) =f (local stock, global REIT, global stock market, global EPU (economic policy uncertainly), global interest), We shall leave this integration/contagion issue for future work.

2. “Second, the references mentioned in the paper are not very numerous. If there aren’t that many studies related to REIT perhaps there could be relevant studies related to the dependence between other areas of the financial market and the local and global stock markets. Also, the mechanism/reasons behind these dependences could be of interest.”

Response:  Thank you for your comments.

• A new section (Section 2) “Brief literature” was included. All other existing sections affected were re-numbered accordingly
• Please read the new Section 2, 1^st paragraph for the write-up,”……..Within the context of market integration, Liow and Song (2022) explore the frequency connectedness of volatilities across 14 international REIT markets over the last ten years. They evaluate whether the REIT volatility connectedness results from short-, medium- or long-term impacts of shocks can reveal the underlying frequency sources of volatility connectedness. They also identify the systematic risk source that the US REIT market played an influential role in volatility connectedness across global REITs.”
• Please also read Section 2, 3^rd paragraph for the new write up. “The literature on quantile regression in financial markets is growing. This is important as these studies not only indicate evidence of quantile regression between different (sets) of domestic and international (/global) stock markets, as well as between financial markets and macroeconomics factors. Mensi et al. (2014) examine the dependence structure of the emerging stock markets between BRICS countries and influential global factors using the quantile regression method. They the BRICS markets’ dependence with the global stock and commodity markets (S&P index, oil and gold) as well as changes in the US stock market uncertainty (CBOE Volatility Index). This dependence structure is often asymmetric and affected by the onset of the recent global financial crisis. Albulescu et al. (2020) investigate the casual relationship between banking and real estate sectors in the US using a daily quantile causality framework from August 31,2006 to September 9,2016. Their non-linearity tests indicate the suitability of the quantile causality approach to uncover causal effects at tail quantiles that are much different from those at middle quantiles and at the mean. The findings reveal bi-directional causality that derived from only lower and upper levels of quantiles, suggesting that the returns in each of the markets under study can be used to predict the returns of the other market in bullish and bearish conditions, and not under normal conditions. Accordingly, investors should be cautious in hedging the risk across these markets when they are extremely unstable. Another study by Abuzayad et al. (2020) consider co-movement and portfolio management by analysing the time-varying correlation, hedging ratios and portfolio weights. Using daily data from January 6, 2003 to April 11, 2018, they show significant shift in correlation coefficients between the two assets under financial and economic stress. Consequently, potential diversification benefits appear limited when investing across REITs and stock markets. During crisis periods, investors are subject to a high cost for rebalancing their positions in REITs to mitigate stock portfolio risk. Further analyses confirm the inability of REITs to play hedge and safe-haven roles against stock market. Balcilar et al. (2020) find that the relationship between daily housing returns with mortgage default risks is in fact nonlinear, and hence a linear predictive model is mis-specified. They use a k-th order nonparametric causality-in-quantiles test, which in turn test for predictability over the entire conditional distribution of housing returns and volatility, by controlling for misspecification due to nonlinearity. Consequently, their results show that mortgage default risks do indeed predict housing returns and volatility, barring at the extreme upper end of the respective conditional distributions. Lesame et al. (2021) investigate the time-varying interconnectedness of international REIT markets using daily REIT prices in twelve major REIT countries since the GFC. They construct dynamic total, net total and net
  pairwise return and volatility connectedness measures to better understand systemic risk and the transmission of shocks across REIT markets. Their findings show that that REIT market interdependence is dynamic and increases significantly during times of heightened uncertainty, including the COVID-19 pandemic. The US REIT market along with major European REITs are generally sources of shocks to Asian-Pacific REIT markets. Finally, other recent QR stock market integration studies include:  Rejeb and Arfaoui (2016); Nasser and Hajilee (2016); Rejeb (2017) and Nusair /Al-Khasawneh (2018); Aslanidis et al (2021); Peng at el. (2018); Yang et al. (2018); Naifar (2016), You (2017), Kumar et al. (2019, Dohaimani (2017) and Das and Kannadhasan (2020).”
• The reference list has been expanded accordingly.

Round 2

Reviewer 1 Report

I am fine with the revised manuscript