Random Walks and Market Efficiency: Evidence from International Real Estate Markets

Abstract

This study performs tests of the random walk hypothesis for international commercial real estate markets utilizing stock market indices of real estate share prices for three geographical regions: Europe, Asia and North America. The augmented Dickey-Fuller and Phillips-Perron unit root tests and Cochrane variance ratio test find that each of these markets (as well as associated broader stock markets) exhibits random walk behavior. Moreover, a non-parametric runs test provides support for weak-form market efficiency in the real estate markets. In addition, Johansen-Juselius co-integration analysis reveals that all three markets appear co-integrated and share a common long-run stochastic trend. Results of co-integration analyses and vector error correction models suggest that diversification benefits through international real estate securities can only be achieved in the short run.