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Revisiting the Autocorrelation of Real Estate Returns

Author

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  • Kuang Kuang Deng

    (Shanghai University of Finance and Economics)

  • Siu Kei Wong

    (University of Hong Kong)

Abstract

Real estate returns often show highly positive autocorrelation. However, with the Hong Kong housing market data, we found two anomalies. For one, the autocorrelations of the district-level submarket returns are mostly negative. For the other, despite the negative or insignificant submarket autocorrelations, the autocorrelation of the aggregate market returns is highly positive. This study explains the two patterns. First, we show analytically how observed autocorrelation, transaction noise, and the speed of return adjustment are related. The model suggests that even if return adjusts instantly to news, the transaction noise in observed prices will lead us to observe a negative autocorrelation. An empirical approach is derived to recovering the adjustment speed of returns from the negatively biased autocorrelation. Second, the autocorrelation of returns of a market is a function of not only the autocorrelations of its submarkets, but also the cross lead-lag relationships between the submarkets. Strong cross lead-lag relationships inflate the autocorrelation of the aggregate market returns. Two competing hypotheses for explaining the cross lead-lag relationships between submarkets, namely spatial information diffusion and transaction costs, are tested. Empirical tests based on Hong Kong housing market data support the transaction cost hypothesis against spatial diffusion.

Suggested Citation

  • Kuang Kuang Deng & Siu Kei Wong, 2023. "Revisiting the Autocorrelation of Real Estate Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 67(2), pages 243-263, August.
    • Handle: RePEc:kap:jrefec:v:67:y:2023:i:2:d:10.1007_s11146-021-09830-8
    DOI: 10.1007/s11146-021-09830-8
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    More about this item

    Keywords

    Autocorrelation of asset returns; Transaction noise; Aggregation of real estate returns; Spatial diffusion; Transaction cost;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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