Dynamic correlations between REIT sub-sectors and the implications for diversification

James Chong, Alexandra Krystalogianni and Simon Stevenson

Applied Financial Economics, 2012, vol. 22, issue 13, 1089-1109

Abstract: The issue of whether Real Estate Investment Trusts (REITs) should pursue a focused or diversified investment strategy remains an ongoing debate within both the academic and industry communities. This article considers the relationship between REITs focused on different property sectors in a Generalized Autoregressive Conditional Heteroscedasticity-Dynamic Control Correlation (GARCH-DCC) framework. The daily conditional correlations reveal that since 1990 there has been a marked upward trend in the coefficients between US REIT sub-sectors. The findings imply that REITs are behaving in a far more homogeneous manner than in the past. Furthermore, the argument that REITs should be focused in order that investors can make the diversification decision is reduced.

Date: 2012
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DOI: 10.1080/09603107.2011.639735

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