Real Estate Markets and Uncertainty Shocks: A Variance Causality Approach

This paper investigates the impact of macroeconomic effects of uncertainty on the conditional volatility of US-listed Real Estate Investment Trusts (REITs). To this end we employ three widely accepted US REITs indices and the two uncertainty indices constructed by Baker et al. (2013). Our sample is extensive covering the period from 4th of January 1999 to 28th of June, 2013. We employ the recently developed test of causality in variance by Hafner and Herwarz (2006) and then we track the response of REITs conditional volatility to various key events as marked by the evolution of the uncertainty indices. Our results provide some useful insights for the causal nexus between real estate and macroeconomic environment. We provide evidence in favor of a two-way transmission channel between REITs conditional volatility and macroeconomic uncertainty. Moreover, equity REITs appear rather sensitive to deteriorating investors' sentiment. Our results entail policy implications for investors, regulators and monetary authorities.