Testing the Predictability and Efficiency of Securitized Real Estate Markets

Since the early 1970s and the seminal papers of Fama (1965, 1970), the efficient market hypothesis and its validity for several asset markets have been the topic of an uncountable number of publications in finance. The efficient market hypothesis deals with the question whether stock prices fully reflect all information available at a specific point in time. Weakform tests of the efficient market hypothesis focus on the information set of historical prices or return series. Today, there is abundant empirical evidence that stock markets are efficient, at least in its weak form. This means that investors are not able to earn excess returns compared to a buyandhold strategy by developing and using trading strategies. In contrast, the validity of the efficient market hypothesis is analyzed in less detail for international securitized real estate stock markets, and the few studies that exist focus mainly on the US-market. Thus, this paper examines the behavior of securitized real estate returns for 14 countries over the period from January 1990 to December 2006. The parametric test results indicate that the random walk hypothesis is rejected for several markets. However, since the rejection of the random walk hypothesis does not necessarily imply market inefficiency, a non-parametric technique to test for market efficiency is also conducted. Additionally, the practical relevance of rejecting the random walk hypothesis is tested by implementing trading strategies based on moving averages. Empirical evidence shows that the return generating process of the major securitized real estate markets differs significantly from the theoretical model of a random walk. The empirical findings of return predictability suggest that investors are likely to earn excess returns by using past information in most of the public real estate markets. Trading strategies based on moving averages allowing them to earn risk-adjusted excess returns are compared to a buy-and-hold strategy.

Schindler, Felix, Nico Rottke and Roland Füss (2009), Testing the Predictability and Efficiency of Securitized Real Estate Markets, ZEW Discussion Paper No. 09-054, Mannheim.