Co-movement across european stock and real estate markets

Abstract

This study questions the reliability of securitized real estate investment trusts (REITs) for reducing risk in European stock investment portfolio during the global and European crisis periods. It considers co-movement and portfolio management by analyzing the time-varying correlation, hedging ratios, and portfolio weights. Using daily data from January 6, 2003 to April 11, 2018, the results 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 downturns. Our findings provide useful insights for investors and portfolio managers to formulate trading strategies, determine asset allocation, and assemble optimal portfolios. 2020 Elsevier Inc.