Causality between Real Estate Market and Stock Market: Evidence from REIT Index in Taiwan

This paper investigates short-run dynamic interactions between real estate investment trust (REIT) index and stock market index in Taiwan over the 2006-2015 periods. In addition to traditional linear analysis, the recently developed models are applied to explore the possible short-run non-linear linkage between the two indexes. The results of linear Granger causality tests show weak evidence of linear causality from REIT index to stock index. Further analysis from non-linearGranger causality test sreveals no causality between the two indexes. These findings have important implication for investors. Introduction and Literature Review Diversification of aport folio is an important issue of great concern for investors and researchers. To construct a well-diversified portfolio, investors usually need to look for a group of assets whose returns have low correlation or move in the unlike direction. The Real Estate Investment Trust (REIT) created in the 1960is a unique in vestment asset with a mixed characteristic of both the real estate market and the stock market. In recent years, the REIT is favored by investors in their investment decision-making process, typically because the REIT has stable high dividends with a moderate risk compared to stock market investment. The REIT also has advantages of an inflation hedge, good liquidity, and tax preference. Since the REIT could help investors share the benefit of real estate growth and build the more broad and optimal investment strategy, understanding the linkages between REIT and other assets is of the utmost importance to investors seeking to make a well-diversified portfolio. Numerous studies on the real estate market have been devoted to recognizing the factors affecting the REIT returns. These studies have documented that the size of the REIT[1,5], interest rate[3, 20],money policy[8,20], and economic growth [17]have a significant impact on REIT returns. Recently, some other researchers highlight and confirm the momentous shock of the global financial crisis on the REIT returns[21]. In a more recent paper, Loo et al.[19]study the short-run and long-run linkage between the Asian REIT markets and seven macroeconomic variables. The results show that the influence of the macroeconomic variables on the REIT return varies across countries. Empirical studies on the REIT also have investigated the dynamic interactions between REIT and other assets because of its implication for portfolio allocation an drisk management. Most of these studies focus on the US market and show that the change in the REIT prices is closely related to the change in the stock prices[2,9,15,16,17,18,26]. The early study by Liu et al. [18]document that the US securitized real estate market is integrated with the stock market but the US commercial real estate market is segmented from the stock market. Ling and Naranjo[16]find evidence of integration between the US real estate securities and the stock market and that the degree of integration increases significantly during the 1990s. Analyzing the dynamic conditional correlation of REIT, stock, and direct real estate returns, Fei et al. [9]reveal strong correlation between US REIT returns and stock market returns over 1987-2008.Liow[17]applies fractional integration vector error International Conference on Manufacturing Engineering and Intelligent Materials (ICMEIM 2017) Copyright © 2017, the Authors. Published by Atlantis Press. This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/). Advances in Engineering, volume 100