Work detail

European Real Estate Investment Trusts: Analyzing Correlation with a DCC-GARCH Model

Author: Mgr. Jiří Jílek
Year: 2012 - summer
Leaders: Tomáš Jandík, CFA, MRICS
Consultants:
Work type: Finance, Financial Markets and Banking
Masters
Language: English
Pages: 66
Awards and prizes:
Link:
Abstract: The main goal of this thesis is to study the interdependencies between returns of European real
estate investment trusts (REITs) and other investment asset classes such as European equities,
government bonds and commodities. The thesis is divided into two parts: in the first part, we
describe the necessary background that led to the emergence of first REIT structures and also
provide an overview of the European REITs market. In the second part, we apply the Dynamic
Conditional Correlation GARCH (DCC-GARCH) model to examine correlations between
the above mentioned asset classes. The general understanding of real estate is that it provides
diversification benefits to a diversified portfolio. However, our results suggest that returns of
European REITs and stocks show a relatively high correlation and more importantly,
the correlation increases in time. These findings have significant implications for investors and
portfolio managers who seek protection for their portfolios in time of market downturns. Our
results further indicate low and decreasing correlation for government bonds, while
the correlation between returns of REITs and commodities is low and increasing in time.
The added value of this thesis lies in the employment of the DCC-GARCH model on the
European REIT data.

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