ACADEMIC PAPERS: Are real estate and securities markets integrated? Some Australian evidence

Conventionally, between 5 and 20 per cent of a portfolio is invested in real estate. Whether this is prudent diversification or not depends on whether property and other financial assets markets are integrated. The notion of market integration/segmentation across the economy is of central importance. Disturbances in market fundamentals in a given market generate movements of capital into and out of the affected market. If various markets are well integrated, then it is expected that a high degree of asset substitution will take place, such substitution having a significant impact on price fluctuations in the relevant market. On the other hand, if markets are not integrated, then this has significant implications for portfolio investment where managers seek to develop well‐diversified portfolios as a means of risk reduction. Recent literature has recognized the need to understand and measure the degree of market integration, and research has focused on techniques to do this. Studies have attempted to measure the degree of integration in money and bond markets, real assets markets and among international real estate investment trusts. Uses cointegration techniques to examine the extent to which physical real estate markets and financial assets markets are integrated. Tends to support the notion of market segmentation and, by default, supports the conventional wisdom of diversification between real estate and other financial assets.