Further Evidence of the Integration of Securitized Real Estate and Financial Assets

As institutions in most countries are faced with limits pertaining to investment in the various asset classes, the free flow of funds from one investment class to another is curtailed and hence segmentation may arise among asset classes. In this study, we focus on the integration of securitized real estate with stocks and bonds. We use data for Switzerland, which is of particular interest in this respect, as securitized real estate qualifies as real estate in terms of investment limits. In addition, the legal setup differs substantially from that of most other countries. Using an APT framework, we employ both the Xu (2003, Extracting Factors with Maximum Explanatory Power, Working paper, University of Texas, Dallas) method and an innovative procedure to determine endogenous and exogenous factors, respectively. Integration is assessed by means of several tests. Swiss real estate funds are found to be integrated with both stocks and bonds. Few sources of integration emerge, whereas sources of segmentation are more plentiful. An endogenous real estate factor acts as a factor of integration between securitized real estate and stocks. In contrast, inflation, economic conditions, and the term structure are found to be segmenting factors between real estate funds and financial assets.