Transitory and permanent shock transmissions between real estate investment trusts and other assets: Evidence from time-frequency decomposition and machine learning

Document Type

Article

Publication Date

3-1-2024

Abstract

We evaluate asset returns and volatility connectedness using the time-frequency connectedness model and machine learning approaches. Using 48 years of monthly indices of equity real estate investment trusts (EREITs), mortgage real estate investment trusts (MREITs), stocks, commodities, and bonds, we find that shocks to EREIT, and MREIT returns have a transitory impact on other assets. However, asset volatility connectedness among assets occurs at lower frequencies as markets slowly process pricing information. Therefore, shocks to EREIT and MREIT decay gradually and spill over to the other three assets for long periods. We also find that the intensity of the time-frequency connectedness of returns and volatility varies with business cycles and significant domestic and global non-recession events. We attribute the dominance of real estate investment trusts (REITs) in destabilising the financial system through long-term volatility transmission to the heavy linkage of REITs to highly illiquid underlying direct real estate markets and high REITs leverage, making them more sensitive to real estate fundamentals, monetary shocks and macroeconomic risks than stocks and bonds. The result of the algorithm-based (Formula presented.) machine learning model broadly supports the dominance of EREITs in the transmission of returns and volatility and shows that commodities have more explanatory power in the transmission of volatility than in returns. The empirical findings have implications for strategic and tactical asset allocation and policy design for market stability.

Identifier

85166408330 (Scopus)

Publication Title

Accounting and Finance

External Full Text Location

https://doi.org/10.1111/acfi.13154

e-ISSN

1467629X

ISSN

08105391

First Page

539

Last Page

573

Issue

1

Volume

64

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