The study delivers new implications for risk management and asset allocation by investigating extreme dependences between real estate investment trust (REIT) and stock returns, where ‘extreme dependences’ refer to cross-asset linkages during extraordinary periods. It primarily differentiates itself from prior studies in three respects. First, it examines the role of asymmetric extreme dependences in establishing an optimal investment portfolio during the 2000–2010 period. Second, it provides an economic evaluation of REIT-stock extreme dependences by considering out-of-sample switching fees and break-even transaction costs. Third, it explores the determinants of REIT-stock extreme dependence dynamics during the recent housing boom-and-bust period, which is divided into the housing-boom (pre-break) and housing-bust (post-break) subsamples by the breakpoint of July 31, 2007. The findings demonstrate that the proposed dynamic strategies are superior to a naïve one due to positive break-even transaction costs, and the evaluation results suggest that investors benefit from taking extreme dependences into consideration. It further shows that investors benefit from switching asset holdings from REITs to stocks after the mid-2009, the ending of the recent recession. Except for the illiquidity index, many determinants display weaker explanatory powers of REIT-stock tail dependences in the housing bust than the housing boom.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Sep 26, 2013
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