Speculative bubbles, financial crises and convergence in global real estate investment trusts

We test for price bubbles in fourteen national REIT markets and examine the extent of convergence toward a common trend between the REITs. Our methodology consists of the recently developed test of [1] for mildly explosive processes, and the [2] method for modeling convergence between random variables. We find evidence of explosive behavior in index levels of eleven of the fourteen markets. In contrast explosive dynamics are found in only four price/dividend ratios. Nearly all of the episodes of explosive behavior are date-stamped to periods prior to the 2007-2009 financial crisis. We also find a number of periods over which the markets converge towards a common trend. Interestingly, all of the convergence intervals coincide with either periods of crises, or periods of market exuberance (bubbles).