European Real Estate Risk and Spillovers: Regime Switching Approach

Abstract

© 2018, Springer International Publishing AG, part of Springer Nature. In this study, we employ an international version of the Capital Asset Pricing Model (ICAPM) to measure and examine the relationship between each of the 13 European national real estate returns and the European stock market returns over the period from January 1999 to December 2016. Our measure of this relationship is the time-varying European real estate beta, which is an index of European real estate’s systematic risk. This time varying beta of the ICAPM for a country’s real estate market is computed by the ratio of the covariance between the expected returns of each country and the European stock market portfolio to the variance of the expected returns on the European stock market portfolio. For this purpose, we first find the location of the crisis and period in time using a Markov Switching approach, Then the AR(1)-GJR(1)- Dynamic Conditional Correlation model is estimated to obtain both covariance and variance of each pair return.