Canadian REITs and Stock Prices: Fractional Cointegration and Long Memory

Abstract

The literature is not clear on whether there are co-dependencies domestically across real estate and stock markets, despite the importance of this question for portfolio diversification strategies. In this article, we use fractional cointegration and long memory techniques to search for co-dependence in the Canadian markets. The measures of long-term persistence employed are the modified rescaled range statistic (R/S) proposed by Lo (1991), and the rescaled variance (V/S) statistic proposed by Giraitis et al. (2003). We find evidence to suggest long co-memories between stock and securitized property markets in the long term, but some evidence is also found in some sub-samples. The implication of our results is that securitized property and stocks are not considered to be substitutable assets over the short run and these assets may be held together in a portfolio for diversification purposes. However, over the long run, there is less benefit of holding both assets in a portfolio, since a fractional cointegration is found in the residual series.