Futures trading, spot price volatility and market ...

[Pages:50]Futures trading, spot price volatility and market efficiency: evidence from European real estate securities futures

Article

Accepted Version

Lee, C. L., Stevenson, S. and Lee, M.-L. (2014) Futures trading, spot price volatility and market efficiency: evidence from European real estate securities futures. Journal of Real Estate Finance and Economics, 48 (2). pp. 299-322. ISSN 1573-045X doi: Available at

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Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Future

Article

Lee, C. L., Stevenson, S. and Lee, M. L. (2014) Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Future. Juornal of Real Estate Finance & Economics, 48 (2). pp. 299-322. doi: 10.1007/s11146-012-9399-3 Available at

It is advisable to refer to the publisher's version if you intend to cite from the work.

Published version at:

To link to this article DOI: Publisher: Springer

All outputs in CentAUR are protected by Intellectual Property Rights law, including copyright law. Copyright and IPR is retained by the creators or other copyright holders. Terms and conditions for use of this material are defined in the End User Agreement.

reading.ac.uk/centaur

CentAUR Central Archive at the University of Reading

Reading's research outputs online

Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate

Securities Futures

Accepted for publication in Journal of Real Estate Finance and Economics

Chyi Lin Lee (University of Western Sydney), Simon Stevenson (University of Reading) & Ming Long Lee

(National Dong Hwa University)

Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Futures

Chyi Lin Lee School of Economics and Finance, University of Western Sydney, Locked Bag 1797, Penrith

NSW 2751, Australia. Email: chyilin.lee@uws.edu.au

Simon Stevenson School of Real Estate and Planning, Henley Business School, University of Reading,

Whiteknights, Reading, RG6 6UD United Kingdom Email: s.a.stevenson@reading.ac.uk

Ming-Long Lee Department of Finance, National Dong Hwa University No. 1, Sec. 2, Da Hsueh Rd., Shoufeng, Hualien 97401, Taiwan

Email: ming.long.lee@mail.ndhu.edu.tw

Keywords: Real estate securities futures, GARCH, volatility, hedging effectiveness and Europe

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Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Futures

Abstract

In 2007 futures contracts were introduced based upon the listed real estate market in Europe. Following their launch they have received increasing attention from property investors, however, few studies have considered the impact their introduction has had. This study considers two key elements. Firstly, a traditional GARCH model, the approach of Bessembinder & Seguin (1992) and the Gray's (1996) Markov-switching-GARCH model are used to examine the impact of futures trading on the European real estate securities market. The results show that futures trading did not destabilize the underlying listed market. Importantly, the results also reveal that the introduction of a futures market has improved the speed and quality of information flowing to the spot market. Secondly, we assess the hedging effectiveness of the contracts using two alternative strategies (na?ve and OLS models). The empirical results also show that the contracts are effective hedging instruments, leading to a reduction in risk of 64%.

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Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Futures

1: Introduction The introduction of dedicated index derivative contracts has only been a relatively recent phenomenon in the listed real estate market. This is despite their long history and trading in the broader equity markets, other financial assets and in some markets the provision of stock option contracts for real estate firms. Furthermore, the importance of index futures contracts based on real estate securities has long been highlighted (e.g. Oppenheimer, 1996; Liang et al., 1998; Newell & Tan, 2004; Clayton, 2007; Ong & Ng, 2009). In principle, an index futures contact would offer an opportunity for institutional investors to reduce the risk of their portfolios, provide an alternative means of gaining exposure to the real estate security sector and to enhance the liquidity of listed real estate investment. Despite these factors it was only in 2002 when the first index futures contract specifically concerned with the real estate equity sector was launched. This first contract was introduced by the Australian Securities Exchange and based on the S&P/ASX 200 A-REIT Index. This was followed by contracts being developed by the Chicago Board of Trade in 2007 (Dow Jones US Real Estate Index Futures) and the Tokyo Stock Exchange in 2008 when J-REIT futures were launched. In October 2007, the NYSE LIFFE Euronext introduced two futures contracts specifically concerned with the European market. Importantly, the listed real estate sector in Europe has expanded considerably over the course of the last decade, as of June 2011, there were a total 830 real estate stocks with a total market capitalization of 321.1bn. This equates to 24% of the global listed property market (EPRA, 2011).

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