By testing Granger causality of interest rates on REIT’s total return index, the study found out this indirect causal relationship have some similarities with the direct relationship between REIT’s total return index and interest rate concluded by earlier studies. The first similarity is that the relationship does exist but is time-specific. For the whole tested time frame of 16 years, REITs is sensitive to all 11 maturities of CMT. However, when testing on the sub-periods, the long-term CMTs are found to “Granger” cause REIT’s total return during the 2008 financial crisis while none of the CMTs have explanatory power on REITs during stable environment. The result is in coherence with hypothesis of REIT’s high sensitivity to long-term interest rate. It also support an earlier finding that REIT takes more effect from interest rate during shocks than during stable times. In explaining the results, the thesis analyses the three main channels through which REIT takes effect from interest rate changes. They are through financial market forces (supply and demand), real estate industry and operating activity.
This model of testing for Granger causality, which is also time-specific, should be done as a prerequisite for building time series model as it helps to decide which variable should be included. The thesis practices Toda-Yamamoto procedure, which is recommended for Granger causality test as it allows better data flexibility
