Market Efficiency in the Emerging Securitized Real Estate Markets

Ever since the seminal papers of Fama (1965, 1970), the analysis of the efficient market hypothesis has been a key topic in both theoretical and empirical capital market analysis. The efficient market hypothesis seeks to answer the question of whether stock prices fully reflect all information available at a specific point in time. Weak-form tests of the efficient market hypothesis focus on the information set of historical prices or return series. Random walk properties of equity prices influence return dynamics, and market efficiency is often considered an essential criterion in assessing the functionality of markets and the asset pricing process, which is of significant relevance for emerging markets in particular. While there is abundant empirical evidence today that developed stock markets are at least weak form efficient and investors are not able to earn excess returns compared to a buy-and-hold strategy by developing and using trading strategies, this finding is more controversial for emerging markets. Thus, the crucial question of the analysis is whether the results from stock markets also hold for securitized real estate markets – in particular against the background that the efficient market hypothesis is rejected for even several developed securitized real estate markets, as shown by Schindler et al (2009) as well as Serrano and Hoesli (2009). Thus, this paper examines the behavior of securitized real estate returns for twelve emerging markets as well as four developed markets over the period from January 1992 to December 2009. The analysis is based on autocorrelation tests as well as both single and multiple variance ratio tests. Furthermore, non-parametric runs tests are conducted. As a further robustness check and due to their practical relevance, trading strategies based on moving averages are implemented as well. Empirical evidence shows that the emerging securitized real estate markets can not be considered less developed, with respect to their market efficiency characteristics, than the markets in countries such as Australia, Japan, the U.K., and the U.S. By contrast, and in contrast to the broad stock markets, the price formation process at emerging markets can not be considered less efficient than that at the four mentioned developed markets from a statistical point of view. The results are confirmed by analyzing excess returns following from technical trading rules.

Schindler, Felix (2010), Market Efficiency in the Emerging Securitized Real Estate Markets, ZEW Discussion Paper No. 10-033, Mannheim.