Climate Risks and Prediction of Sectoral REITs Volatility: International Evidence

Afees Salisu, Ahamuefula Ogbonna, Elie Bouri () and Rangan Gupta
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Elie Bouri: School of Business, Lebanese American University, Lebanon

No 202434, Working Papers from University of Pretoria, Department of Economics

Abstract: This study examines the nexus between climate risks and the return volatility of the real estate investment trusts (REITs) market, a topic of increasing importance for market participants in both emerging and developed economies. Using sectoral REITs from 14 selected countries and alternative measures of climate risks involving both country-specific (climate change vulnerability index, based on climate news) and global (climate policy uncertainty index) measures, reflecting both physical and transition climate risks, we apply a predictive model that accommodates the salient features of the data. Our results indicate that REIT volatility generally increases in response to climate policy uncertainty in most countries. However, the resilience of REITs to the adverse effects of climate change is underscored, providing a sense of confidence in the market's ability to withstand these climate challenges. This outcome transcends the in-sample predictability as the out-of-sample forecast performance validates the predictive content of climate change risks for REITs return volatility. The findings have important practical and policy implications.

Keywords: Climate risks; emerging and developed economies; sectoral REITs; realized volatility; feasible quasi-generalized least squares (FQGLS) method; forecast evaluation (search for similar items in EconPapers)
JEL-codes: C53 Q54 R3 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2024-08
New Economics Papers: this item is included in nep-env
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