Dynamics of private and public real estate markets

Using five assets (T-bills, bonds, stocks, and bath public and private real estate), this study investigates how cointegration of capital markets affe cts the dynamics of public and private real estate markets. The results sho w that the price indices of the five assets are nonstationary and cointegra ted. Some implications for the long-term equilibrium relationship for portf olio diversification, price discovery and prediction are discussed. In a Gr anger causality framework, error-correction augmented VAR models (VECM) and unrestricted VAR models are compared with respect to the conclusion regard ing the interaction between public and private real estate returns. VECM is also shown to improve the prediction of private real estate returns relati ve to an unrestricted VAR model. These results raise questions about previo us research studies regarding the dynamics between public and private real estate returns. It is shown that the long-term equilibrium relationship est ablishes a feedback between the two real estate markets, but the private ma rket seems to informationally lead the public one. Possible explanations ar e also explored.