Title: The impact of expectations on the co-integration relationship between the stock and REIT markets

Authors: Umit Erol; Aydin Yuksel; Asli Yuksel; Hakki Ozturk

Addresses: Department of Economics and Finance, Faculty of Economics, Administrative and Social Sciences, Bahcesehir University, Ciragan Caddesi, No. 4, Besiktas, Istanbul, Turkey ' Department of Management, Faculty of Economics, Administrative and Social Sciences, Isik University, Mesrutiyet Mahallesi, Universite Sokak, No. 2, Sile, Istanbul, Turkey ' Department of Economics and Finance, Faculty of Economics, Administrative and Social Sciences, Bahcesehir University, Ciragan Caddesi, No. 4, Besiktas, Istanbul, Turkey ' Department of International Finance, Faculty of Economics, Administrative and Social Sciences, Bahcesehir University, Ciragan Caddesi, No. 4, Besiktas, Istanbul, Turkey

Abstract: This paper examines if expectations have a significant impact on the co-integration relationship between stock and real estate investment trust markets. We use two widely followed expectation indicators which are the US yield spread and the expected US stock market volatility (VIX) to test this hypothesis. The US yield spread is decomposed into two components which are the expected short-term interest rate (EF) and a variable term premium (TP) using Hamilton-Kim algorithm. A dataset covering ten developed markets is used. Using co-integration score analysis our findings indicate that expected US short-term interest rates and expected US stock market volatility have a statistically significant and positive impact on the global co-integrations of different countries. This effect is especially valid in the post-global financial crisis period. The expectation-based indicators EF and VIX, however, do not seem to have a significant impact on co-integration at regional and local levels.

Keywords: global; regional co-integration; the US yield spread; expected US short-term interest rates; variable term premium; international diversification.

DOI: 10.1504/GBER.2022.124626

Global Business and Economics Review, 2022 Vol.27 No.1, pp.20 - 42

Received: 19 May 2021
Accepted: 18 Aug 2021
Published online: 29 Jul 2022 *

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