Asset pricing, spatial linkages and contagion in real estate stocks

Following recent methodological developments, we estimate a spatial multi-factor model (SMFM) which combines asset pricing techniques with spatial econometrics to assess systemic implications for REIT index returns. We distinguish between co-movement due to market risk exposure (systematic risk) and co-movement due to linkages between markets (spillover risk). We find that the spillover risk dramatically increases during the global financial crisis and can explain up to 60% of total asset variation. In the rest of the time, idiosyncratic risks have been the predominant type of risk in real estate stocks. Our results have implications for investors showing that the market can channel asset volatility leading to contagion during crisis periods and therefore residual linkages between country indices need to be accounted for as a means of assessing the diversification benefits of a global portfolio.