Volatility spillovers and REIT hedging across sectors: Evidence from us and UK markets

This is the authors' abstract. We don't add key points for this paper.

This study rigorously investigates volatility spillovers between REITs and stock markets in the US and UK, specifically differentiating between market and sector-specific interactions. Utilising a robust multivariate GARCH framework with data from 2000 to 2021, the research meticulously examines how these dynamics shift during periods of market distress, including the Global Financial Crisis and the COVID-19 pandemic. Findings reveal that volatility spillovers are generally weaker at the industry level compared to the broad market level, highlighting enhanced diversification potential when real estate is strategically paired with select equity sectors. Crucially, real estate’s hedging effectiveness is highly contingent on the nature of the crisis: it significantly eroded during the GFC, an endogenous property-led shock, but remarkably improved during COVID-19, an exogenous health shock. These insights underscore the critical importance of sector-level risk dynamics and context-specific hedging strategies for real estate portfolio management. For investors, this implies the need for dynamic, sector-tailored allocations and hedge ratios to optimise risk-adjusted returns. For policymakers, the study highlights real estate’s dual role in systemic resilience, advocating for refined macroprudential over- sight that accounts for both property-led contagion and external-shock stabilisation scenarios. The actionable guidance offered is vital for optimising multi-asset portfolios and enhancing financial stability.