The impact of the global financial crisis on the co-integration relationship between REIT and stock markets: A dynamic co-integration approach

Yüksel S. A., Yuksel A., Erol U., Ozturk H.

INTERNATIONAL JOURNAL OF ECONOMICS AND FINANCE, vol.9, no.7, pp.86-98, 2017 (Peer-Reviewed Journal)


The aim of this paper is to analyze the impact of the Global Financial Crisis (GFC) on the co-integration relationship between the REIT and stock market indices using a sample of 10 developed countries. The main tool employed for this purpose is the dynamic co-integration approach. The empirical results strongly suggest that the stock and REIT markets were deeply affected by two successive crises. The first crisis was related to the U.S. subprime problems while the second shock emanated from the European insolvency problems. The shocks led to serious structural breaks in the financial data during the 2007-2012 period. As a result of this and the highly variable nature of the co-integration structure during this period, the conventional and static Johansen tests cannot detect the strong co-integration between the REIT and stock markets which were the result of common negative response of both markets to the successive shocks. Dynamic co-integration approach seems to be a more valid tool to capture the dynamics of the co-integration structure after the GFC. The dynamic approach implies that the destruction of diversification benefits between the REIT and stock markets was essentially a shock related outcome which also implies that the diversification potential between these two markets may still be valid in the absence of shocks.