Hedging effectiveness of REIT futures

Chyi Lin Lee and Ming‐Long Lee

Journal of Property Investment & Finance, 2012, vol. 30, issue 3, 257-281

Abstract: Purpose - The hedging effectiveness of real estate investment trust (REIT) futures as a critical issue in response to the global REIT market has been extremely volatile in recent years, however few studies have been placed on this area. This study aims to fill in this gap and examine the hedging effectiveness of Australian and Japanese REIT futures over 2002‐2010. Design/methodology/approach - The analysis of this study involves two stages. The first stage is to estimate optimal hedge ratios. A variety of hedging methods is employed, including a traditional hedge, an ordinary least squares (OLS) model and a bivariate GARCH model. Thereafter, the hedging effectiveness of these strategies is assessed individually. Findings - The empirical results show REIT futures are effective hedging instruments in which a risk reduction of 37 per cent‐78 per cent (34 per cent‐52 per cent) for Australian (Japanese) REITs is evident. Importantly, the results also reveal that REIT futures outperform other hedging instruments in which a weaker risk reduction is found by stock, interest rate and foreign currency futures contracts. Moreover, the hedging effectiveness of REIT futures is dynamic and varies over time. Practical implications - The findings enable more informed and practical investment decision‐making regarding the role of REIT futures in risk management. Originality/value - This paper, as far as the authors are aware, is the first study to offer empirical evidence of the risk‐reduction effectiveness of REIT futures. The hedging effectiveness of REIT futures is also compared to other hedging instruments for the first time.

Keywords: Hedging effectiveness; Real estate investment trust futures; Real estate; Trusts; Investments; Australia; Japan (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jpifpp:v:30:y:2012:i:3:p:257-281

DOI: 10.1108/14635781211223824

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