REITs (Real Estate Investment Trusts) and CMBS (Commercial Mortgage-Backed Securities) are securitized real estate equity and debt representing claims on real property or commercial mortgages. In the last two decades, REIT and CMBS markets have grown very fast and become important asset classes. The National Association of Real Estate Investment Trusts (NAREIT) shows that the market capitalization outstanding of US REITs has increased from $8.7 billion at the end of 1990 to $438 billion at the end of 2006, and then decreased to $192 billion at the end of 2008 due to the financial crisis.
According to the Commercial Mortgage Securities Association (CMSA), the CMBS market has grown from $41.6 billion in CMBS outstanding in 1990 to $913 billion in 2007. In addition, these asset classes might have emerged to provide additional diversification benefits because they offer investment opportunities in diversified real estate market pools and maintain rather strong links with the direct private real estate market. Nevertheless, such diversification opportunities might have changed during the recent financial crisis, which originated in the US real estate market.
In the literature, it is widely recognized that correlations and linkages among different asset classes evolve over time as macroeconomic conditions change and new information is released. Understanding the nature of the time variation in the correlations between different assets has crucial implications for asset allocation and risk management. In this context, have REITs and CMBS become more correlated over time with general financial markets so that their diversification potential is diminished?
Do REITs and CMBS exhibit asymmetry not only in conditional volatilities, but also in the conditional correlation? What causes time-varying conditional correlation between REITs, CMBS, and general financial markets? Does the recent financial crisis play any role in driving the correlation structure?
