Dynamic effects of financial stress on the U.S. real estate market performance

Based on the theoretical framework of financial amplification, this study investigates the dynamic effects of financial stress on the performance of the U.S. real estate market proxied by Real Estate Investment Trust (REIT) returns in the United States using vector autoregressive (VAR) analysis. Based on the analysis of monthly REIT returns and the monthly changes in the Federal Reserve Bank of St. Louis Financial Stress Index spanning 1994–2011, the response of returns on the CRSP Ziman REIT indices and sub-indices becomes negative in the first few months following the spike in financial stress. The Granger-causality tests indicate that financial stress causes the returns on the CRSP Ziman REIT indices and sub-indices to drop. The variance decomposition analyses show that financial stress is relatively more important than the overall stock market in forecasting the errors of the returns on the CRSP Ziman REIT indices and sub-indices.