Assessing conditional volatility among REITS and Stock returns; Evidence from Pakistan

Abstract

This study investigates the conditional volatility and dynamic correlations between Real Estate Investment Trusts (REITs) and stock returns in Pakistan using daily data. Given the growing significance of REITs as an asset class, understanding their volatility in relation to stock market movements is crucial for investors and policymakers. Employing the Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroscedasticity (DCC-GARCH) model, the research examines time-varying correlations between REITs and stock returns, which are influenced by market fluctuations, economic shifts, and external shocks. The findings reveal moderate short-term correlations between REITs and stock returns, which strengthen in the long term, suggesting that while REITs are not highly correlated with stock returns in the short run, they may provide a diversification benefit over a longer horizon. The study also shows that both markets exhibit volatility clustering, with stock returns showing higher volatility persistence. These insights contribute to the limited literature on REITs in emerging markets, particularly Pakistan, where only three REITs are currently listed. The results provide valuable guidance for investors, highlighting the potential for REITs to act as a diversification tool in volatile market conditions, while also informing risk management and asset allocation strategies. Additionally, the findings can help policymakers develop regulatory frameworks to support the growth and stability of the REIT sector in Pakistan, fostering broader investor confidence and market development. This research offers a deeper understanding of the interplay between REITs and stock returns in an emerging market context, with implications for both financial institutions and regulatory bodies.