Testing the Predictability and Efficiency of Securitized Real Estate Markets

This study conducts tests of the random walk hypothesis and market efficiency on fourteen national public real estate markets. The random walk properties of equity prices influence return dynamics and determine investor trading strategies. To examine the stochastic properties of local real estate index returns and test the hypothesis that public real estate stock prices follow a random walk, we use the single static and dynamic variance ratio tests of Lo and MacKinlay (1988), as well as the multiple variance ratio test of Chow and Denning (1993). Weak-form market efficiency is tested for directly by using non-parametric runs tests. Empirical evidence shows that weekly stock prices in major securitized real estate markets do not follow a random walk. The findings suggest that investors may be able to develop trading strategies that allow them to earn excess returns compared to a buy-and-hold strategy.