empirical analysis, while the fourth section delineates the econometric methodology
employed in the analysis. Empirical results are reported in the fifth section, while some
further analysis using demand indices is contained in the following section. A final section
summarizes the findings and the implications of the study.
2 Review of the Literature
A great number of studies have shown that securitized real estate returns tend to lead returns
in the direct real estate market. In other words, empirical research suggests that there is a
price discovery mechanism between securitized and direct real estate markets.1 It is a
common view that this lead-lag relationship is due to the more rapid response of the
securitized market to shocks in the fundamentals. The better liquidity, greater number of
market participants, smaller transaction costs and the existence of a public market place in the
securitized market have been seen as the factors behind the quicker adjustment of the
securitized real estate market.
Among the several studies that have contained empirical evidence supporting the
leading role of securitized real estate with respect to direct real estate in the U.S. or British
markets are Gyourko and Keim (1992), Myer and Webb (1993), Barkham and Geltner (1995),
Eichholtz and Hartzell (1996), Li et al. (2009), and Oikarinen et al. (2010). Newell and Chau
(1996), in turn, report a short-term leading relationship for real estate companies over
commercial real estate in Hong Kong, and Ong (1994, 1995) and Liow (2001) in Singapore.
On the other hand, Myer and Webb (1994) and Newell et al. (2005) do not find significant
Granger causality between securitized and direct commercial real estate. However, both of
these examinations are based on short sample periods, 1983-1991 in the former and 1995-
2002 in the latter.
Note that, generally, Granger causality from securitized to direct real estate is implied
even when the influence of appraisal smoothing has been extracted from the direct return