Empirical Evidence on the Asymmetric Relationship between Bond and REIT Returns

Abstract

This paper examines the asymmetric relationship between bonds and REITs using monthly data from January 1972 through October 2014. In particular, the paper uses the nonlinear Granger causality test developed by Diks and Panchenko to underpin the dynamic interactions between bond yields and REIT returns. The results from the various unit root tests indicate that bond and REIT returns are level stationary. The results from the linear Granger causality test indicate that bond and REIT returns are not causally related. However, the results from the nonlinear Granger causality test results suggest that both bond and REIT returns have causal influence on each other. The results of this study suggest that diversification benefits cannot be attained by combining either all REITs or equity REITs in a portfolio with bonds. However, after the establishment of the 1992 Revenue Reconciliation Act, the results reveal that it is possible for investors to reduce their portfolio risks by combining bonds and mortgage REITs in their portfolios.