IDEAS home Printed from https://ideas.repec.org/a/kap/compec/v63y2024i3d10.1007_s10614-023-10431-1.html
   My bibliography  Save this article

COVID-19 and REITs Crash: Predictability and Market Conditions

Author

Listed:
  • Kwangwon Ahn

    (Yonsei University)

  • Hanwool Jang

    (Glasgow Caledonian University)

  • Jinu Kim

    (Yonsei University)

  • Inug Ryu

    (Korea Exchange)

Abstract

This study examines the applicability of the log-periodic power law (LPPL) model for the real estate investment trust (REIT) market in the early stages of the coronavirus disease 2019 (COVID-19) pandemic. Our results indicate that unlike in the 2008 global financial crisis, the market conditions were unsuitable for applying LPPL for predicting the COVID-19-induced critical time in the REIT market. Before the pandemic, investors’ herding behavior was extremely weak, and market efficiency was improving, indicating a low probability of the formation of endogenous bubbles. Thus, policymakers should use this bubble-based model while carefully considering market conditions, including investors’ herding behavior and market efficiency. For this purpose, the power law exponent and Hurst exponent can be used to gauge market conditions along with comprehensive market information regarding the appropriateness of applying the LPPL model.

Suggested Citation

  • Kwangwon Ahn & Hanwool Jang & Jinu Kim & Inug Ryu, 2024. "COVID-19 and REITs Crash: Predictability and Market Conditions," Computational Economics, Springer;Society for Computational Economics, vol. 63(3), pages 1159-1172, March.
    • Handle: RePEc:kap:compec:v:63:y:2024:i:3:d:10.1007_s10614-023-10431-1
    DOI: 10.1007/s10614-023-10431-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10614-023-10431-1
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10614-023-10431-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Escobari, Diego & Jafarinejad, Mohammad, 2016. "Date stamping bubbles in Real Estate Investment Trusts," The Quarterly Review of Economics and Finance, Elsevier, vol. 60(C), pages 224-230.
    2. Omokolade Akinsomi, 2020. "How resilient are REITs to a pandemic? The COVID-19 effect," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 39(1), pages 19-24, July.
    3. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    4. Clark, Andrew, 2004. "Evidence of log-periodicity in corporate bond spreads," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 338(3), pages 585-595.
    5. Ogonna Nneji & Chris Brooks & Charles Ward, 2013. "Commercial Real Estate and Equity Market Bubbles: Are They Contagious to REITs?," Urban Studies, Urban Studies Journal Limited, vol. 50(12), pages 2496-2516, September.
    6. Rama Cont & Jean-Philippe Bouchaud, 1997. "Herd behavior and aggregate fluctuations in financial markets," Science & Finance (CFM) working paper archive 500028, Science & Finance, Capital Fund Management.
    7. Brée, David S. & Joseph, Nathan Lael, 2013. "Testing for financial crashes using the Log Periodic Power Law model," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 287-297.
    8. Chiang, Thomas C. & Zheng, Dazhi, 2010. "An empirical analysis of herd behavior in global stock markets," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1911-1921, August.
    9. Anders Johansen & Olivier Ledoit & Didier Sornette, 2000. "Crashes As Critical Points," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 219-255.
    10. Lux, Thomas & Sornette, Didier, 2002. "On Rational Bubbles and Fat Tails," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 589-610, August.
    11. Maximilian Brauers & Matthias Thomas & Joachim Zietz, 2014. "Are There Rational Bubbles in REITs? New Evidence from a Complex Systems Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 49(2), pages 165-184, August.
    12. Rangan Gupta & Zhihui Lv & Wing-Keung Wong, 2019. "Macroeconomic Shocks and Changing Dynamics of the U.S. REITs Sector," Sustainability, MDPI, vol. 11(10), pages 1-12, May.
    13. Alvarez-Ramirez, Jose & Alvarez, Jesus & Rodriguez, Eduardo & Fernandez-Anaya, Guillermo, 2008. "Time-varying Hurst exponent for US stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(24), pages 6159-6169.
    14. Ricardo J Caballero & Alp Simsek, 2021. "A Model of Endogenous Risk Intolerance and LSAPs: Asset Prices and Aggregate Demand in a “COVID-19” Shock [Financial intermediaries and the cross-section of asset returns]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5522-5580.
    15. Petr Geraskin & Dean Fantazzini, 2013. "Everything you always wanted to know about log-periodic power laws for bubble modeling but were afraid to ask," The European Journal of Finance, Taylor & Francis Journals, vol. 19(5), pages 366-391, May.
    16. Johansen, Anders, 2003. "Characterization of large price variations in financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 157-166.
    17. Xavier Gabaix, 2009. "Power Laws in Economics and Finance," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 255-294, May.
    18. Rama CONT & Jean-Philippe BOUCHAUD, 1997. "Herd behavior and aggregate fluctuations in financial markets," Finance 9712008, University Library of Munich, Germany, revised 06 Jan 1998.
    19. Hyeonoh Kim & Eojin Yi & Daeyong Lee & Kwangwon Ahn & Zhi-Qiang Jiang, 2022. "Technological Change and Market Conditions: Evidence from Bitcoin Fork," Complexity, Hindawi, vol. 2022, pages 1-7, November.
    20. Yi, Eojin & Ahn, Kwangwon & Choi, M.Y., 2022. "Cryptocurrency: Not far from equilibrium," Technological Forecasting and Social Change, Elsevier, vol. 177(C).
    21. Ji, Guseon & Dai, Bingcun & Park, Sung-Pil & Ahn, Kwangwon, 2020. "The origin of collective phenomena in firm sizes," Chaos, Solitons & Fractals, Elsevier, vol. 136(C).
    22. Cheng, Fangzheng & Fan, Tijun & Fan, Dandan & Li, Shanling, 2018. "The prediction of oil price turning points with log-periodic power law and multi-population genetic algorithm," Energy Economics, Elsevier, vol. 72(C), pages 341-355.
    23. Gurdip Bakshi & Nikunj Kapadia & Dilip Madan, 2003. "Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options," The Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 101-143.
    24. Ryu, Inug & Jang, Hanwool & Kim, Dongshin & Ahn, Kwangwon, 2021. "Market Efficiency of US REITs: A Revisit," Chaos, Solitons & Fractals, Elsevier, vol. 150(C).
    25. Lin, L. & Ren, R.E. & Sornette, D., 2014. "The volatility-confined LPPL model: A consistent model of ‘explosive’ financial bubbles with mean-reverting residuals," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 210-225.
    26. Wang, Yudong & Liu, Li, 2010. "Is WTI crude oil market becoming weakly efficient over time?: New evidence from multiscale analysis based on detrended fluctuation analysis," Energy Economics, Elsevier, vol. 32(5), pages 987-992, September.
    27. Parameswaran Gopikrishnan & Martin Meyer & Luis A Nunes Amaral & H Eugene Stanley, 1998. "Inverse Cubic Law for the Probability Distribution of Stock Price Variations," Papers cond-mat/9803374, arXiv.org, revised May 1998.
    28. David S. Bree & Nathan Lael Joseph, 2010. "Testing for financial crashes using the Log Periodic Power Law mode," Papers 1002.1010, arXiv.org, revised Apr 2013.
    29. P. Gopikrishnan & M. Meyer & L.A.N. Amaral & H.E. Stanley, 1998. "Inverse cubic law for the distribution of stock price variations," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 3(2), pages 139-140, July.
    30. Chansoo Kim & Daniel S Kim & Kwangwon Ahn & M Y Choi, 2017. "Dynamics of analyst forecasts and emergence of complexity: Role of information disparity," PLOS ONE, Public Library of Science, vol. 12(5), pages 1-18, May.
    31. Anders Johansen & Didier Sornette, 2001. "Bubbles And Anti-Bubbles In Latin-American, Asian And Western Stock Markets: An Empirical Study," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 4(06), pages 853-920.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hanwool Jang & Yena Song & Sungbin Sohn & Kwangwon Ahn, 2018. "Real Estate Soars and Financial Crises: Recent Stories," Sustainability, MDPI, vol. 10(12), pages 1-12, December.
    2. Fry, John & Cheah, Eng-Tuck, 2016. "Negative bubbles and shocks in cryptocurrency markets," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 343-352.
    3. Sornette, Didier & Woodard, Ryan & Yan, Wanfeng & Zhou, Wei-Xing, 2013. "Clarifications to questions and criticisms on the Johansen–Ledoit–Sornette financial bubble model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4417-4428.
    4. Bikramaditya Ghosh & Spyros Papathanasiou & Vandita Dar & Dimitrios Kenourgios, 2022. "Deconstruction of the Green Bubble during COVID-19 International Evidence," Sustainability, MDPI, vol. 14(6), pages 1-18, March.
    5. Jang, Hanwool & Song, Yena & Ahn, Kwangwon, 2020. "Can government stabilize the housing market? The evidence from South Korea," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 550(C).
    6. Bikramaditya Ghosh & Spyros Papathanasiou & Nikita Ramchandani & Dimitrios Kenourgios, 2021. "Diagnosis and Prediction of IIGPS’ Countries Bubble Crashes during BREXIT," Mathematics, MDPI, vol. 9(9), pages 1-14, April.
    7. Cheah, Eng-Tuck & Fry, John, 2015. "Speculative bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin," Economics Letters, Elsevier, vol. 130(C), pages 32-36.
    8. Anirban Chakraborti & Ioane Muni Toke & Marco Patriarca & Frederic Abergel, 2011. "Econophysics review: I. Empirical facts," Quantitative Finance, Taylor & Francis Journals, vol. 11(7), pages 991-1012.
    9. Li Lin & Didier Sornette, 2015. ""Speculative Influence Network" during financial bubbles: application to Chinese Stock Markets," Papers 1510.08162, arXiv.org.
    10. Fantazzini, Dean, 2016. "The oil price crash in 2014/15: Was there a (negative) financial bubble?," Energy Policy, Elsevier, vol. 96(C), pages 383-396.
    11. John Fry & McMillan David, 2015. "Stochastic modelling for financial bubbles and policy," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 1002152-100, December.
    12. Martin Herdegen & Sebastian Herrmann, 2017. "Strict Local Martingales and Optimal Investment in a Black-Scholes Model with a Bubble," Papers 1711.06679, arXiv.org.
    13. Hideyuki Takagi, 2021. "Exploring the Endogenous Nature of Meme Stocks Using the Log-Periodic Power Law Model and Confidence Indicator," Papers 2110.06190, arXiv.org.
    14. Shihai Dong & Yandong Wang & Yanyan Gu & Shiwei Shao & Hui Liu & Shanmei Wu & Mengmeng Li, 2020. "Predicting the turning points of housing prices by combining the financial model with genetic algorithm," PLOS ONE, Public Library of Science, vol. 15(4), pages 1-20, April.
    15. Fantazzini, Dean & Nigmatullin, Erik & Sukhanovskaya, Vera & Ivliev, Sergey, 2016. "Everything you always wanted to know about bitcoin modelling but were afraid to ask. I," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 44, pages 5-24.
    16. Jovanovic, Franck & Schinckus, Christophe, 2017. "Econophysics and Financial Economics: An Emerging Dialogue," OUP Catalogue, Oxford University Press, number 9780190205034.
    17. Kristoffer Pons Bertelsen, 2019. "Comparing Tests for Identification of Bubbles," CREATES Research Papers 2019-16, Department of Economics and Business Economics, Aarhus University.
    18. Makoto Nirei & John Stachurski & Tsutomu Watanabe, 2018. "Trade Clustering and Power Laws in Financial Markets (Published in Theoretical Economics, 15:1365?1398, 2020)," CARF F-Series CARF-F-450, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    19. Nirei, Makoto & Stachurski, John & Watanabe, Tsutomu, 2020. "Trade clustering and power laws in financial markets," Theoretical Economics, Econometric Society, vol. 15(4), November.
    20. Grobys, Klaus, 2023. "A finite-time singularity in the dynamics of the US equity market: Will the US equity market eventually collapse?," International Review of Financial Analysis, Elsevier, vol. 89(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:compec:v:63:y:2024:i:3:d:10.1007_s10614-023-10431-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.