Journal of Risk Model Validation

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Modeling impacts of stock jumps on real estate investment trust returns with application to value-at-risk

Fen-Ying Chen

  • This paper is the first to directly model the effects of stock jumps on REIT returns associated with an alternative dynamic process, which can capture the effect of jumps in the expected returns and volatilities of REITs.
  • The model can efficiently describe the effect of stock returns on REITs. The empirical results show that the analytical VaR solution is confirmed as reliable according to the Christoffersen’s independence test (1998) during the pre- and post- crisis periods.
  • The effects of stock returns on expected returns and volatility of REITs cannot be neglected. Empirical results find that sensitivities of the magnitudes of jumps in expected returns and volatility are larger than means, volatilities and jump intensities. 
     

In contrast to most of the existing literature that has concentrated empirically on the relationship between real estate investment trust (REIT) prices and the stock market, this paper directly models the effects of stock jumps on REIT returns associated with an alternative dynamic process. Three key features of the model are that it decomposes the impacts of stock jumps into two parts (the effect of jumps in the expected returns of REITs, and the influence of jumps in REIT volatility); it can efficiently describe the effect of stock returns on REITs according to Christoffersen’s independence test during pre- and postcrisis periods; and the empirical results show that the magnitudes of jumps in expected returns and volatility are sensitive to the value-at-risk of REITs. Therefore, the effects of stock returns on expected returns and volatility of REITs cannot be neglected.

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