International Evidence on the Predictability of Returns to Securitised Real Estate Assets: Econometric Models Versus Neural Networks

Journal of Property Research, Vol. 20, No. 2, pp. 133-156, 2003

Posted: 5 Dec 2004

See all articles by Chris Brooks

Chris Brooks

University of Bristol - School of Economics, Finance and Management

Sotiris Tsolacos

University of Reading - Centre for Spatial and Real Estate Economics (CSpREE)

Abstract

This paper examines the performance of various statistical models and commonly used financial indicators for forecasting securitised real estate returns for five European countries: the UK, Belgium, the Netherlands, France and Italy. Within a VAR framework, it is demonstrated that the gilt-equity yield ratio is in most cases a better predictor of securitised returns than the term structure or the dividend yield. In particular, investors should consider in their real estate return models the predictability of the gilt-equity yield ratio in Belgium, the Netherlands and France, and the term structure of interest rates in France. Predictions obtained from the VAR and univariate time-series models are compared with the predictions of an artificial neural network model. We find that, whilst no single model is universally superior across all series, accuracy measures and horizons considered, the neural network model is generally able to offer the most accurate predictions for 1-month horizons. For quarterly and half-yearly forecasts, the random walk with a drift is the most successful for the UK, Belgian and Dutch returns and the neural network for French and Italian returns. Although this study underscores market context and forecast horizon as parameters relevant to the choice of the forecast model, it strongly indicates that analysts should exploit the potential of neural networks and assess more fully their forecast performance against more traditional models.

Keywords: Real estate returns, vector autoregressive models, neural networks, forecasting

JEL Classification: C32, C52

Suggested Citation

Brooks, Chris and Tsolacos, Sotiris, International Evidence on the Predictability of Returns to Securitised Real Estate Assets: Econometric Models Versus Neural Networks. Journal of Property Research, Vol. 20, No. 2, pp. 133-156, 2003, Available at SSRN: https://ssrn.com/abstract=626702

Chris Brooks (Contact Author)

University of Bristol - School of Economics, Finance and Management ( email )

School of Accounting and Finance
15-19 Tyndalls Park Road
Bristol, BS8 1PQ
United Kingdom

Sotiris Tsolacos

University of Reading - Centre for Spatial and Real Estate Economics (CSpREE) ( email )

Department of Economics Whiteknights P.O. Box 219
Reading, RG6 6AH
United Kingdom
44-0118-931-823 (Phone)
44-118-931-6533 (Fax)

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