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Long memory in REIT volatility and changes in the unconditional mean: a modified FIGARCH approach

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  • Ivelina Pavlova
  • Jang Hyung Cho
  • A.M. Parhizgari
  • William G. Hardin

Abstract

We examine the long memory of real estate investment trust (REIT) volatility in the mature REIT markets of Australia, Japan, the UK and the US, and propose a modified fractionally integrated (FIGARCH) model for forecasting at daily and weekly frequencies. Long memory of volatility occurs when the effects of volatility shocks persist over extended periods of time. Our results suggest that the appearance of long memory in REIT return series is due to a lack of adjustment for temporal changes in the unconditional mean of volatility. Based on our long memory results, we empirically test a modified FIGARCH model and show that it performs better at weekly and daily forecast horizons. Forecasting REIT series volatility has important implications for risk evaluation, portfolio optimisation and derivatives pricing.

Suggested Citation

  • Ivelina Pavlova & Jang Hyung Cho & A.M. Parhizgari & William G. Hardin, 2014. "Long memory in REIT volatility and changes in the unconditional mean: a modified FIGARCH approach," Journal of Property Research, Taylor & Francis Journals, vol. 31(4), pages 315-332, December.
    • Handle: RePEc:taf:jpropr:v:31:y:2014:i:4:p:315-332
    DOI: 10.1080/09599916.2013.877063
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    Cited by:

    1. Salisu, Afees A. & Gupta, Rangan & Bouri, Elie, 2023. "Testing the forecasting power of global economic conditions for the volatility of international REITs using a GARCH-MIDAS approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 303-314.
    2. Bonato, Matteo & Çepni, Oğuzhan & Gupta, Rangan & Pierdzioch, Christian, 2021. "Do oil-price shocks predict the realized variance of U.S. REITs?," Energy Economics, Elsevier, vol. 104(C).
    3. Jiqian Wang & Rangan Gupta & Oğuzhan Çepni & Feng Ma, 2023. "Forecasting international REITs volatility: the role of oil-price uncertainty," The European Journal of Finance, Taylor & Francis Journals, vol. 29(14), pages 1579-1597, September.
    4. Matteo Bonato & Oguzhan Cepni & Rangan Gupta & Christian Pierdzioch, 2022. "Forecasting realized volatility of international REITs: The role of realized skewness and realized kurtosis," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(2), pages 303-315, March.
    5. Matteo Bonato & Oguzhan Cepni & Rangan Gupta & Christian Pierdzioch, 2020. "Uncertainty due to Infectious Diseases and Forecastability of the Realized Variance of US REITs: A Note," Working Papers 202099, University of Pretoria, Department of Economics.

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