Volatility interdependence in European securitised real estate markets: who is the most influential?

This paper investigates interdependence of weekly conditional volatility in 10 FTSE-NAREIT-EPRA European developed securitized real estate markets (The United Kingdom, France, Germany, Netherlands, Italy, Finland, Norway, Sweden, Switzerland and Spain) from November 1990 to December 2011. We first model the returns in a VAR-BEKK framework to obtain the conditional variances, and then apply the vector-autoregressive model (VAR) to the ten market variance, with focus on variance decomposition and volatility spillover index. Under the variance decomposition methodology, the decomposition of the forecast error variance determines explicitly how much of the conditional volatility movement in one market could be explained by other markets in terms of the volatility of the forecast variance of that market. Following the procedures developed by Diebold and Yilmaz (2007) (Measuring financial asset return and volatility spillover, with applications to global equity markets, http://ssrn.com/abstract=956918), a volatility spillover index is constructed for the full period, as well as for the recent global financial crisis period. This process hopes to reveal which real estate securities market is the most influential in transmitting volatility to the other European securitized real estate markets. Finally, since international investors incorporate into their portfolio selections no only the return correlation structure but also the market volatility interaction, the results of our study can shed light on the extent to which investors can benefit from international real estate securities diversification in the European developed countries.