Volatility of International REITs in Response to Investor Sentiment and Economic Policy Uncertainty: A Predictive-Based GARCH-MIDAS Approach

We examine the power of investors’ sentiment in forecasting the daily return volatility of various international Real Estate Investment Trust (REIT) indices. More importantly, we hypothesise that economic policy uncertainty is an influencing factor of investor sentiment and that it matters for enhancing the forecasting power of investor sentiment in the predictability of volatility of REITs. To accommodate the mix-frequency nature of the variables of interest, we employ the GARCH-MIDAS framework based on its merit of circumventing the problem of loss of information that often arises during data aggregation and biases through data disaggregation. We show results that give credence to evidence of forecast gains in the model that accommodate investors’ sentiment and significant in-sample predictability, where increasing displays of sentiment in investor decisions tend to spur risk associated with international REITs. Further analysis shows the possibility of economic policy uncertainty improving the forecasting power of investors’ sentiment in the out-of-sample forecasts of REIT volatility. Consequently, monitoring global economic policy uncertainty and its potential as an influencing factor in investors’ sentiment is crucial for optimal investment decisions.