A Jump Diffusion Model Research On The Risk And Return Of REITs

The global economic crisis of2008was triggered initially by securitization of subprime mortgage loan, which also interrupted the process of China-REITs Given the derivative feature of Real Estate Investment Trusts (REITs), the risk and return of REITs are different from traditional financial tools, such as stocks, bonds, etc. It is very necessary to profoundly understand the rule of the risk and return of REITs since the development of REITs is up to the acceptance of REITs in capital market. How and to what extent REITs affect the real economy in positive direction or in negative direction is not only a theoretical conundrum but also an empirical conundrum, which also affect the scale and institutional design of REITs in China.Using common stocks as a reference point for judging, this paper applies a jump diffusion model to analyze the risk and return of REITs on the basis of Markov Chain Monte Carlo (MCMC) methodology using daily date from4th, April,2002to4th, April,2012. In order to analyze the different characters of REITs before and after the subprime crisis, the paper divides the whole sample into two subsamples. The empirical analysis reveals that the returns of REITs index and real estate stock index decline greatly after subprime crisis while the variance of both markets get greater than before the subprime crisis, so the subprime crisis has a great negative effect on American real estate market. And the amplitude of variation of REITs’parameters are smaller than that of real estate stocks index which indicates that REITs is more stable than real estate stocks in the face of market risks. What’s more, this paper finds that the parameters of REITs and real estate stock are very close and the jump magnitude, jump time and jump frequency are almost identical. To some extent we can say that REITs has identical features with real estate stocks. All these characters indicate that REITs can be considered as a perfect substitute for the real estate stocks.In order to study the synergistic relationship between REITs and real estate stocks, we empirically study information spillover among REITs and real estate stocks based on cross-correlation function and find there is no information spillover among the both markets due to high homogeneity. All these findings further prove that REITs as an investment tool not only supply a new financing channel for real estate companies but also lower the threshold for the investors to invest real estate industry, so REITs is a good substitute for investing real estate for medium and small investors. And the synergistic relationship between REITs and real estate stocks has great significance for the rational investor to grasp the relationship between real economy and fictitious economy.