The Journal of Real Estate Finance and Economics (2023) 66:939–962

https://doi.org/10.1007/s11146-021-09879-5

Fractional Integration and Volatility Transmission

Between Real Estate and Stock Markets: Novel Evidence
from a FIGARCH‑BEKK Approach

Maria I. Kyriakou1 · Athanasios Koulakiotis2 · Apostolos Kiohos3 ·

Vassilios Babalos4

Accepted: 9 November 2021 / Published online: 11 December 2021

© The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2021

Abstract
This paper examines the non-linear integration between the real estate and stock
market for a series of developed markets namely UK, Germany, Australia, Hong-
Kong, Japan, Singapore and the US. The period of analysis covers different market
phases for these countries. We examine the volatility dynamics of the real estate and
stock market in the UK and Germany within a novel FIGARCH-BEKK model. Our
results reveal evidence of a common long-term fractional integration between real
estate and stock market for these two countries. Moreover, when there is a lower
common order of fractional integration, there might also be a significant bilateral
or unilateral volatility spillover effect between real estate and stock market. Robust-
ness tests confirm the consistency of the FIGARCH-BEKK model even during the
global financial crisis. Additional tests capture the existence of volatility spillovers
and fractional integration in the rest of countries (Australia, Hong-Kong, Japan, Sin-
gapore and the US) under examination. Our findings entail significant implications
for investors and policy makers.

Keywords Stock markets · Real estate markets · Fractional integration · FIGARCH-

BEKK · Volatility transmission

JEL Classifications G01 · G1 · R2

Introduction

It is well established across academics and researchers of financial economics that

real estate has become ‘just another asset class’. Financialization of real estate is a
new reality across various countries around the world, especially in the developed

* Maria I. Kyriakou
m_kyriakou1@yahoo.gr
Extended author information available on the last page of the article

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Vol.:(0123456789)
940 M. I. Kyriakou et al.

economies. Traditional and modern banking activities being in the core of large
financial institutions such as mortgage lending and securitization have significantly
intensified the links between housing and finance (Aalbers, 2016). Real estate invest-
ing has become nowadays easier through modern collective schemes such as closed
end funds (Real Estate Investment Trusts) or open-ended funds (real estate funds)
offering investors a great variety of real estate opportunity without being obliged to
buy a property through the housing market.
Transformation of real estate from a commodity that it used to be to a financial
asset attracts both investors and speculators. The so-called financialization of real
estate has triggered a debate around the diversification benefits of including real
estate in a portfolio of financial assets with diverse risk-return profiles. An investor
therefore could build a well-diversified portfolio of stock and real estate investments
as long as the two assets are not cointegrated (Driessen & Laeven, 2007). For this
reason, testing for cointegration between assets and its magnitude during various
market phases is a well-researched topic with practical implications for portfolio
managers. However, since the pioneer work of Cheung and Lai (1993) and Baillie
and Bollerslev (1994), academics and researchers consider fractional cointegration
as a more robust tool than standard methods of cointegration (see inter alia Caporale
et al. (2016)). Although fractional integration has been widely used in the analysis
of stock markets and other areas, there are few studies that examine the existence
of fractional cointegration between real estate and stock market. In particular, Liow
and Yang (2005) detected fractional cointegration between real estate returns and
stock market returns for a selected set of Asia–Pacific countries namely Japan, Hong
Kong, Singapore and Malaysia. As such, for the pairs of real estate and stock market
that a long-term co-memory is detected it follows that these two assets should not
be held together in a portfolio for diversification purposes. Recently, Kiohos et al.
(2017) report a fractional integration with ‘wealth effect’ between stock and real
estate markets for UK and Germany by means of a novel ECM-ARFIMA model.
Gil-Alana et al. (2020) employing standard cointegration techniques and fractional
cointegration failed to detect any long run equilibrium between the real estate and
stock market returns in BRICS. Meanwhile, causality runs both ways in the case of
South Africa, thus both “wealth effect” and “credit effect” are present, while only
“credit effect” is observed in India and Russia.
Volatility spillovers across assets or markets have attracted attention of various
studies because of its implications for portfolio risk management and market stabil-
ity in general. However, the interaction of volatility between real estate and stock
markets has not received much attention in the literature mainly because of the lack
of a well-organized centralized market and the hybrid nature of real estate stocks.
For example, Stevenson (2002) employing a GARCH model attempted to capture
volatility transmission between the returns of REITs and stock market returns at a
monthly frequency. His results revealed a time-dependent volatility and highly asso-
ciated to small cap and value stocks.
However, Cotter and Stevenson (2006) employing daily returns found that
the second moment relationship between REITs and value stocks was not that
strong. In a similar context, Hoesli and Reka (2013) examined volatility transmis-
sions between real estate and stock markets by means of an asymmetric t-BEKK

13
Fractional Integration and Volatility Transmission Between… 941

(Baba-Engle-Kraft-Kroner) specification of their covariance matrix for US, UK and

Australia.
Our paper is different from previous studies in several ways. Firstly, we exam-
ine two markets Germany and UK which are interesting cases as revealed by the
facts presented below. Germany is the largest European economy, offering impor-
tant investment opportunities for both real estate and stock market investors. Real
estate market in Germany has not been strongly hit by the recent global financial
crisis of 2008/09 while having a steady behavior over the long term (Kofner, 2014).
According to a recent study presented by Deutsche Bundesbank (2016), the Ger-
man real estate market has received a lot from the robust economic and financial
performance, the well-working labor market and the fast population growth mainly
fueled by the increasing number of migrants and around-zero interest rates. Moreo-
ver, the fall of many financial markets triggered by the recent global financial crisis
of 2008/09 meaning that German real estate market is an attractive destination for
real estate investors from around the world (Scharmanski, 2012).
Moreover, Kiohos et al. (2017) supports that in the past 30 years, UK house
prices had received the largest increase among OECD economies and produced the
largest variability compared to OECD countries. The UK’s real estate sector dam-
aged greatly among the G7 economies during the global financial crisis. On the
other hand, Germany received a boom in the real estate sector in a short period
after the Great Recession. Finally, Germany based its financial system in banking
sector, whereas the UK has a market-oriented system. In this context we examine
the common order of fractional integration within a bivariate FIGARCH-BEKK
model which accounts for volatility spillovers. Volatility spillovers will confirm
that changes in volatility in one market causes changes in volatility in the other. Our
purpose is to disentangle the non-linear transmission mechanism between stock and
real estate markets and the relevant implications for active market traders. To the
best of our knowledge, this is the first study to explore for any information trans-
mission in the volatility of real estate and stock markets. To this end, we employ a
FIGARCH-BEKK model, extending Baillie’s (1996) methodology, with respect to
the risk measures from a univariate FIGARCH model to the bivariate FIGARCH-
BEKK approach, as well as the multivariate GARCH-BEKK model first introduced
by Baba et al. (1989) and Engle and Kroner (1995).
In what follows, two hypotheses are tested through standard and novel statistical
tests: (a) whether there exists a common order of integration in the volatility process
and (b) the importance and direction of volatility spillovers in the short run.
Our motivation is to yield, through our findings, considerable focus on the impor-
tance of a non-linear relationship between real estate and stock markets and facili-
tate both practitioners and investors.
Secondly, as a robustness test, we develop two novel models the HYGARCH-
BEKK and the VECH-HYGARCH. The former model accounts for multiple trans-
mission channels in the covariance of the real estate and stock market for Germany
and UK. In particular, we consider two-way spillover effects between the stock mar-
ket and real estate market in the first one and no spillover directions in the latter
approach in order to confirm the importance of FIGARCH-BEKK model’s results.
Our aim is to identify whether standard methods like those we developed here are

13
942 M. I. Kyriakou et al.

appropriate to justify the results between the two markets or whether more advanced
methods are necessary.
Previewing our results, we provide evidence of common long-term fractional
integration between the two markets for the two countries. Our results reveal that,
when there is a lower common order of fractional integration, there might be a sig-
nificant bilateral or unilateral volatility spillover effect between real estate and stock
market. The HYGARCH-BEKK and the VECH-HYGARCH model developed con-
firm that the FIGARCH-BEKK model is appropriate to explain the two transmission
directions in UK and Germany. Additionally, a set of robustness tests with the con-
strained GARCH-BEKK, the full GARCH-BEKK and the FIGARCH models cap-
ture the non-linear volatility correlations, volatility spillovers and fractional integra-
tion in other countries such as Australia, Hong-Kong, Japan, Singapore and the US.1
In this way, we extended our analysis to a wider range of countries providing further
support to our results.
Against this background the layout of the rest of the paper proceeds as follows:
Sect. 2 provides a concise literature review, Sect. 3 outlines the employed method-
ology and data while Sect. 4 discusses empirical results. Section 5 provides some
robustness tests, and finally Sect. 6 concludes and provides the policy implications
for regulators and investors.

Brief Literature Review

Literature on the nature and the dynamics of interaction between securitized real
estate and stock markets has been enriched in the last two decades with many stud-
ies. A quick glimpse of the literature reveals two important issues. On the one hand,
there are many studies that attempt to shed light on the parallel movement, if any, of
real estate and domestic stock markets yielding contradictory results. On the other
hand, the main findings regarding the nature of connectedness between real estate
and stock market could be summarized into four paths. In particular, the interac-
tion between real estate and stock market carries substantial implications for optimal
investment portfolios and there are four potential explanations that have been put
forward in the relevant literature namely the wealth effect (Green, 2002; Kapopoulos
& Siokis, 2005; Okunev et al., 2000; Quan & Titman, 1999; Tsai, 2015), the credit-
price effect (Chen, 2001; Hui & Ng, 2012; Sim & Chang, 2006) the capital switch-
ing effect (Case & Shiller, 2003; Lizieri & Satchell, 1997; Oikarinen, 2006) and the
contagion effect (Tsai, 2015).
Tsai et al. (2012) employ the threshold cointegration model to examine the
existence of asymmetric relationship between the two markets. Their findings
confirm that the wealth effect between real and stock markets appears more
pronounced when the stock market beats real estate more than a specific level.
Finally, Liu and Su (2010) employing asymmetric threshold cointegration tests

1
We would like to thank an anonymous referee for his/her suggestion to extend our analysis to other
countries.

13
Fractional Integration and Volatility Transmission Between… 943

detect comparable findings of the wealth effect in China for short-run period.
However, for longer horizon there are mixed evidence. In reality, the authors
identify a critical value above which there exists a ‘credit price’ effect, whereas
there exists a ‘wealth effect’ below this critical value. This is followed by Su
(2011) who detects both wealth and credit price effects in the real estate markets
and stock markets for European countries of Belgium, France, Germany, Italy,
Netherlands, Spain, Switzerland and the UK. He employed both rank tests and
an econometric method that detects possible non-linear forms of integration. Lin
and Fuerst (2014) report the existence of linear cointegration of stock and real
estate markets in Taiwan, fractional cointegration in Singapore and Hong Kong
and the absence of cointegration in China, Japan, Thailand, Malaysia, Indonesia
and South Korea.
Moreover, there are studies in the US such as Liu and Mei (1992), Ambrose et al.
(1992), Gyourko and Keim (1992), Li and Wang (1995), Ling and Naranjo (1999),
Okunev et al. (2000) revealing that real estate and stock market are related; whereas
others namely Ibbotson and Siegel (1984), Geltner (1991), Ross and Zisler (1991)
failed to confirm any significant integration between the two markets. The results of
this type of studies for the UK market and other studies contribute to the ongoing
debate. In particular, Worzala and Vandell (1993) show a positive correlation, while
Eichholtz and Hartzell (1996) find a negative correlation. The limitation of their stud-
ies was that they failed to account for any potential long-run economic effects. Using
more robust econometric models, Sutton (2002) showed that the behavior of real
estate prices is affected by the stock prices in the UK market. Heaney and Srianan-
thakumar (2012) documented a time-dependent connectedness between stock returns
and Australian real estate returns offering evidence in favor of the ability of real estate
to provide portfolio diversification benefits if combined with equity investments.
The need to measure the degree of market integration between these two markets
has long been recognized and for this purpose more advanced models have been
utilized. Identifying the level of integration or segmentation of the two markets
entails significant implications for investors and policymakers. On the one hand, if
the two markets are well integrated, a high degree of substitution is expected. On
the other hand, substantial diversification benefits emerge when the two markets are
segmented. Okunev and Wilson (1997) developed a model to explain price move-
ments in terms of deviations from market fundamentals. They also provided a model
that favors integration between the two markets. They offered an alternative to that
employed by the Ambrose et al. (1992) approach, developing a non-linear test of
co-integration and supporting the view that the two markets are fractionally co-inte-
grated. Wilson and Okunev (1999) found no evidence of integration between stock
and real estate markets in the UK. Okunev et al. (2000) suggest that the causal rela-
tionship is more likely to flow from stocks to real estate. Apergis and Lambrinidis
(2007) claimed that real estate and stock markets in the UK are highly integrated.
Thus, it is clear from their study that there exists a non-linear integration between
these two markets. Liow and Yang (2005) provide support for the presence of frac-
tional, long-run co-integration between the two markets in the UK. Therefore, the
literature findings can be roughly summarized in the following: there is evidence of

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944 M. I. Kyriakou et al.

a fractional co-integration and the equilibrium error implies a mean reversion that is
not captured by the usual I(0) process.
Existing studies, up to date employ methods, such as the correlation analysis, co-
integration techniques, and causality tests with the exception of Liow (2012) and
Heaney and Sriananthakumar (2012) who adopted dynamic conditional correlation
(DCC) models to identify the time-varying co-movement between the real estate and
stock market. Moreover, previous studies stressed the importance of the time- and
frequency-variation in order to assess the relationship between the two markets (e.g.
Zhou, 2010). The findings for the UK market are, as already stated, controversial,
however non-linear causality study by McMillan (2012), adopting an exponential
smooth transition (ESTR) procedure, documents a one-way causality running from
real estate towards stock market, in this economy.

Data and Methodology

Data

Our sample consists of daily prices of securitized real estate and stock mar-
ket indexes for United Kingdom and Germany and runs from 2/1/1990 through
13/06/2018. Stock market returns are captured using FTSE 100 daily returns for
UK and DAX for Germany respectively. In addition, for the robustness tests we
employed the following stock price indexes for five more countries: All Ordinaries
Ind. Aus. for Australia, Hang Seng for Hong-Kong, NIKKEI 225 for Japan, S&P/
TSX Index for Singapore and S&P500 for the US and run from 2/1/1990 through
13/06/2018. Real estate indexes were sourced from FTSE EPRA/NAREIT, includ-
ing securitized and listed companies that have their core business in real estate
activities (REITs and non-REITS). Data for stock market indexes were sourced from
Thomson Reuters Datastream.

Methodology: A Bivariate Martingale FIGARCH‑BEKK Model

The return equation for the extended FIGARCH-BEKK model is influenced by the
martingale constant and has the following form:
Ri,t = 𝜇i + 𝜀i,t |Ωt−1 ∼ N(0, Ht)fori = 1, 2. (1)
where,

Ri,t is the return for the index under study

μi is the martingale constant drift

Our FIGARCH-BEKK2 (1, d, 2) model takes the following form:

2
The full name of the model is Fractional Integrated Generalised Autoregressive Conditional Heter-
oskedastic—BEKK model. The full GARCH-BEKK and the univariate FIGARCH models is the result
of the FIGARCH-BEKK model.

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Fractional Integration and Volatility Transmission Between… 945

� � � � � �
Ht = CC + A Ht−1 A + BUt 2 B − AUt−1
2 2
A − QUt−2 Q − KUFILTERt K (2)

where,
( ) ( ) ( )�
� 𝜅11 0 (1 − L)d1 0 𝜅11 0
KUFILTERt K = ∗ ∗ Ut ∗
0 𝜅22 0 (1 − L)d2 0 𝜅22

Brunetti and Gilbert (2000) extended the multivariate GARCH model to multi-
variate FIGARCH using the constant correlation. They concluded that the NYMEX
and the IPE volatility processes are co-integrated. Motivated by their approach, we
augmented the GARCH-BEKK variance equation developed first by Baba et al.
(1989) by the vector coefficients of the FIGARCH model as presented in Baillie
et al. (1996) in order to capture both: (a) the fractional integration and (b) volatility
spillovers between real estate and stock index markets.
The parameters of the two-variable systems are estimated by computing the con-
ditional log-likelihood function at each period as:
1 1 ( )� ( )
Lt (Θ) = −log2𝜋 − log||Ht || − E 𝜀t−1 (Θ)Ht−1
−1
(Θ)E 𝜀t−1 (Θ)
2 2

T
∑
andL(Θ) = Lt (Θ) (3)
t=1

where Θ is the vector of all volatility and error estimated parameters. The numeri-
cal maximization of the log-likelihood function follows the BFGS algorithm which
accounts for the maximum likelihood estimates and is associated with asymptotic
standard errors.

Empirical Results

Motivated by the need to understand the degree of non-linear market integration or

segmentation between the two markets we extend the GARCH-BEKK approach to
the FIGARCH-BEKK approach. The notion of causality has been used extensively
in literature, in that it generates parallel movements between the two markets. How-
ever, as already mentioned, the results of the literature are controversial. Some of
the studies (for example Liu et al. (1990), Miles et al. (1990)) find evidence of seg-
mentation, and others (e.g. Ambrose et al. (1992), Gyourko and Keim (1992)) favor
market integration. Our bivariate FIGARCH-BEKK framework (results provided in
Table 1) supports the notion that there is a fractional process in the UK and Ger-
man markets under study. We find significant fractional integration in the long run
between real estate and stock market for the two countries.
The difference between the two markets in the UK is |d2-d1|= 0.461, while in
Germany the relevant figure is |d2-d1|= 0.056. Consistent with Su (2011), in the
UK, volatility spillovers between real estate and stock markets are significant. In
particular, in the UK there is a coefficient α21 (spillover from real estate to stock

13
946 M. I. Kyriakou et al.

Table 1  Bivariate Martingale- Variables UK Germany

FIGARCH-BEKK results
between Real Estate and Stock 𝜇1 0.022 0.017
index Markets (0.006)* (0.010)**
𝜇2 0.099 0.050
(0.001)* (0.009)*
c11 0.512 0.617
(0.02)* (0.013)*
c22 0.317 0.459
(0.01)* (0.013)*
c12 -0.172 -0.365
(0.01)* (0.013)*
𝛼11 0.006 -0.001
(0.001)* (0.015)
𝛼22 -0.019 -0.001
(0.001)* (0.014)
𝛼12 0.001 -0.001
(0.001)* (0.006)
𝛼21 -0.021 -0.001
(0.001)* (0.005)
𝛽11 0.660 0.562
(0.001)* (0.013)*
𝛽22 0.904 0.617
(0.001)* (0.013)*
q11 0.001 -0.001
(0.001) (0.006)
q22 -0.001 -0.001
(0.001) (0.003)
𝜅11 -0.001 -0.001
(0.001)* (0.016)
𝜅22 -0.003 -0.001
(0.001) (0.018)
𝐝1 0.576 0.651
(0.007)* (0.003)*
𝐝2 0.115 0.707
(0.038)* (0.004)*
Log-likelihood -13,077.96 -12,271.17
Diagnostic tests for real estate markets’ standardized residuals
Skewness -0.006214 -4.49
Kurtosis -1.515707 143.59
LB(20) 48.62* 15.428
LB2(20) 111.68* 0.295
Diagnostic tests for stock indexes’ standardized residuals
Skewness 0.099 0.414
Kurtosis -1.531 8.22
LB(20) 36.574** 19.521
LB (20)
2 61.985* 20.186

(*)(**)(***) means significance at the (1%) (5%)(10%) level

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Fractional Integration and Volatility Transmission Between… 947

Table 2  Common Order of Common order of Volatility transmission test

Fractional Integration and fractional integration
volatility transmission tests for test
the two markets
𝐝1 = 𝐝2 𝛼12=0 𝛼21=0

UK 2043.07 260,092.40* 145,817.92*

Germany 8210.86* 1.604763e-011 3.707994e-010

Notes: The above two tests show whether or not there is a common
degree of fractional integration and volatility spillovers in the UK
and Germany between the Real Estate and Sock Price indexes at the
5% significance level

price index volatility) that is significant and equal to 0.021, with low persistence
as it is negative, while the coefficient α12 (spillover from the stock index to the
real estate volatility) is equal to 0.001 and very small in magnitude.
Our diagnostic results indicate that autocorrelation for standardized residuals
and squared standardized residuals in the real estate and stock market are signifi-
cant in the UK but not in Germany. Thus, autocorrelation shows strong depend-
ence in the UK and not in Germany implying that long-term dependence between
these two markets could be further examined within a FIGARCH model in the
UK. This, however, is not the case for Germany as the autocorrelation up to the
­20th lag is not significant at the 10% level.
The common order of fractional integration and volatility transmission results
and tests in Tables 1 and 2 help to examine the validity of the two hypotheses
set earlier: (a) whether there is a common order of fractional integration in the
UK and Germany and (b) whether volatility spillovers exist or not, accounting for
this fractional difference. The results of Table 1 reveal that for the German mar-
ket there is a common order of fractional integration (e.g. long-term reversion)
between the real estate and stock index and thus volatility spillovers might not be
significant between these two markets. In contrast, in the UK there is not a com-
mon degree of fractional integration between the two markets, and, as a result,
volatility spillovers were found to be significant. This means that non-linear vola-
tility spillovers play a significant role in the UK market. Thus, information flow
between real estate and stock market is stronger in the UK than Germany. The
test results presented in Table 2 partly capture this effect. In particular, the results
indicate the common order of fractional integration and non-linear volatility
spillovers for the two markets in the UK and Germany.
We find that there are different bi-directional spillovers between the real estate
and stock price volatilities in the UK, based on the FIGARCH-BEKK model,
while the same test fails to pick up any relationship between these two markets in
Germany. Nevertheless, the test indicates strong fractional divergence (e.g. mar-
ginally long-term reversion) across the markets in UK, revealing no equally direct
relationships between the two markets. Thus, the case in UK implies market seg-
mentation for the two markets and provides opportunities for portfolio risk diver-
sification (Wilson et al., 1996). This means that the UK market is more inefficient

13
948 M. I. Kyriakou et al.

than the German and investors can form their portfolios based on the information
that released.
A potential explanation is that the different structure between the two markets
increases the inefficiency as there is a different degree of common order of frac-
tional integration and information flow. However, Okunev et al. (2000) claim that
there is only a unidirectional relationship from the stock market to the real estate
market, due to the different frame and structure of these markets. Thus, they sup-
port that the real estate and stock markets are somehow segmented as they do
not directly transmit information flows of similar magnitude between each other.
On the contrary, in Germany, there is a large amount of financial asset substitu-
tion between the two markets. These results are important for practitioners and
policymakers.

Robustness Tests

As a robustness test of FIGARCH-BEKK results, we use the HYGARCH-

BEKK and the VECH-HYGARCH models. The first one has such a form where
it incorporates the FIGARCH-BEKK approach in its bivariate form in order to
validate our results and also to see if additional information is provided by the
HYGARCH-BEKK model. The VECH-HYGARCH model can capture the vola-
tility effects during the global financial crisis and for this reason we set out to
test its performance for the years of 2008 and 2009. This model does not show
any spillover direction, which however it is captured by the HYGARCH-BEKK
model.
Those models seem to confirm that a FIGARCH-BEKK methodology is well
developed and tested for the two periods under investigation as these models seem
to produce good results for volatility, fractional integration and spillovers and also
produce some incremental effects for the two periods under investigation. Namely,
both models do confirm the results of the FIGARCH-BEKK model and in addition
the first one produces explanatory results of the transmission under investigation and
the second one seems to work well under troublous periods, such as the crisis of
2008/2009.
The HYGARCH model has been developed by authors in literature in order to
capture the significance of the FIGARCH model. These two models work in paral-
lel. In our case, we developed the FIGARCH-BEKK model and in order to cap-
ture its significance we also developed the HYGARCH-BEKK model in order to be
consistent with the literature. The VECH-HYGARCH model performs well under
extreme periods like the crisis. Our aim was to capture the impact of crisis period
of 2008/2009 on volatility correlation in order to be consistent with the literature.
Additionally, we examine the importance of the constrained GARCH-BEKK, the
full GARCH-BEKK and the FIGARCH models in different countries (e.g. Australia,
Hong-Kong, Japan, Singapore and the US) for the real estate and stock markets sup-
porting the volatility correlation, non-linear volatility transmission and fractional
integration process between these two markets.

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Fractional Integration and Volatility Transmission Between… 949

Bivariate Martingale HYGARCH‑BEKK Results: A Comparison

with the FIGARCH‑BEKK Results

As the HYGARCH model nests the FIGARCH model, we developed the FIGARCH-
BEKK to HYGARCH-BEKK in order to capture any non-linear volatility transmis-
sion in the UK and Germany.
We consider two simultaneous equations, the return equation which has the fol-
lowing formulation:
Ri,t = 𝜇i + 𝜀i,t (4)
and the variance equation which has the following form in a matrix format, fol-
lowing the suggestion of Davidson (2004), however with a more dynamic correla-
tion3 here:
� � � �
2
Ht = CC + BHt−1 B + AUt2 A − [(B − (1 − A) ∗ Δ)] ∗ Ut−1 ∗ [(B − (1 − A) ∗ Δ] −
� �
A ∗ UFILTERt ∗ A + (A ∗ Δ) ∗ UFILTERt−1 ∗ (A ∗ Δ)
(5)
where,
⎛𝛼 0 ⎞
� 11
A ∗ UFILTERt ∗ A = ⎜ ⎟
⎜ 0 𝛼 ⎟
⎝ 22 ⎠
�
⎛ (1 − L)d1 0 ⎞ ⎛𝛼 0 ⎞
⎜ ⎟ ∗ U ∗ ⎜ 11 ⎟
t
⎜ 0 d2 ⎟
(1 − L) ⎠ ⎜ 0 𝛼 ⎟
⎝ ⎝ 22 ⎠
�
(A ∗ Δ) ∗ UFILTERt−1 ∗ (A ∗ Δ)
�
⎛⎛ 𝛼 0 ⎞ ⎛𝛿 0 ⎞ ⎛ (1 − L)d1 0 ⎞ ⎛𝛼 0 ⎞ ⎛𝛿 0 ⎞⎞
11 ⎟ ∗ ⎜ 11 ⎟ ∗ Ut−1 ∗ (⎜ 11 ⎟ ∗ ⎜ 11
= ⎜⎜ ⎟) ∗ ⎜ ⎟⎟
⎜⎜ 0 𝛼 ⎟ ⎜ 0 𝛿22 ⎟ ⎜ 0 (1 − L)d2 ⎟ ⎜ 0 𝛼 ⎟ ⎜ 0 𝛿22 ⎟⎟
⎝⎝ 22 ⎠ ⎝ ⎠ ⎝ ⎠ ⎝ 22 ⎠ ⎝ ⎠⎠

The parameters of the two-set variables are computed by the conditional log-like-
lihood function which has the following form:
T
1 1 ( )� ( ) ∑
Lt (Θ) = −log2𝜋 − log||Ht || − E 𝜀t−1 (Θ)Ht−1
−1
(Θ)E 𝜀t−1 (Θ)andL(Θ) = Lt (Θ)
2 2 t=1
(6)
where Θ is the vector of both, volatility and error parameters. The numerical
maximization of the log-likelihood function follows firstly the SIMPLEX method
for getting initial values for the estimated parameters. Then, the BFGS algorithm is
used, which accounts for the maximum likelihood estimates and the association with
the asymptotic standard errors of the whole bivariate HYGARCH-BEKK model.
The results are reported in Table 3. The results clearly indicate that there is a frac-
tional integration, as d1 = d2 as revealed by the common order of fractional integra-
tion test results. In particular, this result is equal to 2962.45 for the UK and 1941.402

3
A more implicit model, and closer to Davidson (2004) approach, is developed in the next section. We
name this model VECH-HYGARCH, though there are some constraints and it is not a fully parameter-
ized one.

13
950 M. I. Kyriakou et al.

Table 3  HYGARCH-BEKK estimates for UK and Germany

Variables UK Germany

𝜇1 0.021 (0.012)*** 0.023(0.015)

𝜇2 0.028 (0.010)* 0.061 (0.012)*
c11 0.647 (0.008)* 0.889 (0.011)*
c12 -0.181 (0.010)* -0.345 (0.011)*
c22 0.497 (0.005)* 0.646 (0.003)*
a11 0.626 (0.011)* 0.457 (0.007)*
a22 0.909 (0.012)* 0.626 (0.008)*
𝛽11 0.073 (0.008)* -0.022 (0.011)**
𝛽22 0.019 (0.006)* 0.005 (0.001)
𝛽12 -0.010 (0.001)* 0.031 (0.005)*
𝛽21 0.118 (0.005)* -0.001 (0.015)
𝛿11 0.199 (0.008)* -0.012 (0.018)
𝛿22 0.001 (0.005) 0.044 (0.009)*
d1 0.562 (0.006)* 0.673 (0.004)*
d2 0.836 (0.002)* 0.743 (0.003)*
Log-Likelihood -6336.301 -8612.793
Volatility test results
alpha coefficients = 1 delta coefficients = 0 𝛽12 = 0 𝛽21=0
UK 1137.228* 517.835* 186.249*
486.548*
Germany 4913.097* 25.456* 28.373* 0.242
Common order of fractional integration test results
d1 = d2 = 0
UK 2962.45
Germany 1941.402
Diagnostic tests for real estate’s standardized residuals
Skewness 29.624 2.074
Kurtosis 1477.821 36.551
LB(20) 11.207 21.676
LB (20)
2 0.006 1.855
Diagnostic tests for stock indexes’ standardized residuals
Skewness -7.256 0.269
Kurtosis 249.044 2.582
LB(20) 12.602 29.515
LB2(20) 0.095 5.530

(*)(**)(***) denotes significance at the (1%) (5%)(10%) level. Subscript 1 denotes real estate returns and
subscript 2 stock market returns respectively
The volatility spillovers which are significant are highlighted with the black bold colour. These are the
β12 and β21 coefficients, which indicate the significance of spillovers from the second to the first market
and from the first to the second market, respectively

13
Fractional Integration and Volatility Transmission Between… 951

for Germany, where both indicate the importance of a common order of integration
between real estate and stock price indexes. In addition, looking at the non-linear
volatility spillovers between real estate and stock price indexes, it is obvious that the
transmission from the stock price index to the real estate is equal to 0.118 for the
UK market and the transmission from the real estate to the stock price index is equal
to -0.010 in this country. This indicates the non-linear bilateral volatility transmis-
sion on the UK market. This finding is in agreement with the FIGARCH-BEKK
model’s findings. As far as the German market is concerned, the HYGARCH-BEKK
results are more explicit than the FIGARCH-BEKK results, as they indicate a signif-
icant spillover from the stock price index to the real estate market for this case. This
spillover value is equal to 0.031 and indicates the direction of the non-linear volatil-
ity transmission. The results between the two markets of real estate and stock price
index are different, supporting the fact that during the global financial crisis the
reaction of the two markets will be different to shocks from either market real estate
or stock price index to the each other. Thus, it is worth investigating the degree of
non-linear volatility correlations between real estate and stock price indexes.
Furthermore, the volatility test results show that the HYGARCH-BEKK model is
time evolving and is not equivalent to the FIGARCH-BEKK model, as the results of
alpha and delta coefficients show. Autocorrelation is not present in the series of real
estate and stock price indexes, while there is excess kurtosis in the series and skew-
ness is negative for the standardized residuals of stock price returns. This means that
an asymmetric or threshold model could capture some of the asymmetry in the com-
mon fractional integration process (e.g. long-term reversion or stationary) of the two
series, which has remained a puzzle (unexplained). Finally, the coefficients of trans-
mission are found to be different from zero, indicating somehow the importance of
both integration and spillovers. However, this is not the case for the spillover from
real estate to stock price index for Germany.
Below, we develop a VECH-HYGARCH model which is more sophisticated and
thus more effective and does not account for spillovers, but only for correlation of
volatilities without capturing direction. We developed this model in order to see how
a constrained HYGARCH model will perform during the global financial crisis.

A VECH‑HYGARCH Model and an Application during the Global

Financial Crisis of 2008/2009

In this section we investigate the effect of the recent global financial crisis on the
fractional integration of real estate and stock markets of UK and Germany. As stated
earlier, the series are in logarithmic differences. We nest the FIGARCH model to pro-
duce an extended bivariate HYGARCH model (Davidson, 2004), in order to examine
whether the crisis has propagated a different pattern between the two markets in the
UK and Germany. We have chosen the most recent crisis period, as HYGARCH is a
model which performs well in difficult cases, as mentioned by Davidson (2004). Our
model is a Martingale-VECH-HYGARCH approach which takes the following gen-
eral form in a univariate form, based on Davidson (2004) approach:

13
952 M. I. Kyriakou et al.

Rt = 𝜇 + 𝜀t
ht = 𝜔 + (1 − 1−𝛿L
(1 + 𝛼((1 − L)d − 1)))𝜀2t (7)
1−𝛽L

More simply, after the parameters and lag estimations, we use the follow-
ing HYGARCH model in its univariate form, which clearly nests the univariate
FIGARCH model:
Rt = 𝜇 + 𝜀t
ht = 𝜔 ∗ (1 − 𝛽) + 𝛽 ∗ ht−1 + 𝛼 ∗ 𝜀2t − (𝛽 − (1 − 𝛼) ∗ 𝛿) ∗ 𝜀2t−1 − (8)
𝛼 ∗ ufiltert + 𝛼 ∗ 𝛿 ∗ ufiltert−1

If 𝛼 = 1 and 𝛿 = 0, then we move to the FIGARCH model, which has the follow-
ing univariate variance form:

ht = 𝜔 + 𝛽 ∗ ht−1 + 𝜀2t − 𝛽 ∗ 𝜀2t−1 − ufiltert (9)

where,

uf iltert = φ(L)(1 − L)d ∗ ε2t

The parameters of the two-set variables are computed by the conditional log-like-
lihood function which has the following form:
T
1 1 � ∑
−1
Lt (Θ) = −log2𝜋 − log|Ht | − E(𝜀t−1 ) (Θ)Ht−1 (Θ)E(𝜀t−1 )(Θ)andL(Θ) = Lt (Θ)
2 2 t=1
(10)
where Θ is the vector of both, volatility and error parameters. The numerical
maximization of the log-likelihood function follows firstly, the SIMPLEX method
for getting initial values for the estimated parameters. Then, the BFGS algorithm
which accounts for the maximum likelihood estimates and the association with the
asymptotic standard errors of the whole bivariate HYGARCH model is used. We
examine the residuals for large lags, up to order 20 of which is the typical case for
these kinds of models (Table 4).
In both cases, the beta coefficients are 1 and delta coefficients are 0, indicating
similar behavior within the FIGARCH model. This is also obvious from the volatil-
ity test results. We modeled the most extreme case of series in order to capture the
asymptotic result of Chi-squared test. The results provide evidence in favor of small
variations during the crisis period. In addition, the fractional integration coefficient
difference in the UK is twice as that in Germany, which shows a consistency with
the results of FIGARCH-BEKK model. This means that we found, during the cri-
sis period, that there is a common order of fractional integration (mainly long-term
reversion) in Germany and thus the German market is more efficient than the UK
market in the long term. That indicates that the investment opportunities are higher in
the UK than in the German market as the former provides higher risk diversification.
The variance correlation between the two markets points to one-way direction.
The transmission channels of volatility seem to be captured, as the correlation
between the stock price and real estate markets is significant. More sophisticated

13
Fractional Integration and Volatility Transmission Between… 953

Table 4  VECH-HYGARCH Variables UK Germany

estimates for UK and Germany
𝜇1 -0.139 (0.047)* -0.231 (0.066)*
𝜇2 -0.042 (0.013)* -0.125 (0.001)*
c11 -0.071 (0.096) 0.862 (0.302)*
c21 -0.037 (0.040) 0.430 (0.216)**
c22 0.056 (0.034)*** 0.382 (0.180)**
𝛼11 0.358 (0.017)* 0.368 (0.024)*
𝛼12 0.329 (0.010)* 0.204 (0.057)*
𝛼22 0.341 (0.020)* 0.302 (0.051)*
𝛽11 1.078 (0.012)* 0.959 (0.062)*
𝛽12 1.104 (0.009)* 0.944 (0.075)*
𝛽22 1.049 (0.018)* 0.975 (0.046)*
𝛿11 -0.006 (0.017) 0.160 (0.033)*
𝛿22 -0.001 (0.010) -0.080 (0.034)**
𝛿12 0.023 (0.022) -0.054 (0.035)
d 0.261 (0.001)* 0.133 (0.001)*
Log-likelihood -2032.878 -2103.481
Volatility test results
Beta coefficients = 1 Delta coef-
ficients = 0
UK 122.628 1.454
Germany 0.192 8.365
Diagnostic tests for real estate’s standardized residuals
Skewness -0.311 -0.068
Kurtosis 0.926 0.981
LB(20) 18.297 21.740
LB2(20) 28.781*** 29.201***
Diagnostic tests for stock indexes’ standardized residuals
Skewness -0.147 -0.017
Kurtosis 0.992 1.180
LB(20) 14.438 17.664
LB (20)
2 28.583*** 50.788*

Notes: (*)(**)(***) denotes significance at the (1%) (5%)(10%)

level. Subscript 1 denotes real estate returns and subscript 2 stock
market returns respectively

models4 should be used to distinguish between the validity of the transmissions,

allowing for the different impact of volatility and not assuming the same correlation.
Although this has been partly achieved by the FIGARCH-BEKK model our goal is
to examine whether a slightly more advanced model, such as the constrained VECH-
HYGARCH model, shows significant correlations away from the FIGARCH. The
results indicate that the VECH-HYGARCH model can capture the extreme charac-
teristics of the crisis and other fluctuations during the whole period.

4
Such a model is the one presented in the previous section, the HYGARCH-BEKK approach.

13
954 M. I. Kyriakou et al.

Diagnostic tests show that autocorrelation is substantial in the squared standard-

ized residuals of the two series, which means that a HYGARCH model is a good
representation of the series as there is decay in the way one set of series responds to
errors from the other set of series. There is also negative skewness in all the series
and kurtosis is lower than 3, which shows that residuals could be modeled with a
normal distribution. In addition, as skewness is negative, there is asymmetry, with
the lower tail being thicker than the upper one. This could be investigated with an
asymmetric-HYGARCH model in the near future, extending the VECH-HYGARCH
model which is presented here.

Additional Robustness Employing Other Countries with the Original

GARCH‑BEKK and FIGARCH Models

In this section, we analyse the relationship between real estate and stock markets;
also compared with GFC and normal periods. In addition, we extend our analysis
regarding the nonlinear volatility spillover between real estate and stock markets for
more countries. Finally, we measure the long-term reversion or stationarity process
of the real estate and stock price indexes separately in order to be more specific
as far as the fractional integration is concerned. We have provided these results as
the FIGARCH-BEKK model is the outcome of the GARCH-BEKK and FIGARCH
models based on the relevant literature as has been developed by certain authors.5

Constrained GARCH‑BEKK Model’s Results in the Pre‑crisis

of 2006/07, Crisis of 2008/09 and Post‑crisis of 2010/11 years6

One-way volatility and error correlation are investigated in Australia, Hong-Kong,

Japan, Singapore and the US. The results for volatility correlation between real
estate and stock price index returns indicate significance in Australia, Japan and Sin-
gapore for the period of 2006/2007 before the crisis. The volatility correlation found
to be negative in Japan and positive in Australia and Singapore. The error correla-
tion is significant in Japan and in the US. Both, one-way volatility and error correla-
tions are significant in Japan only.
In 2008/2009 years of crisis, the one-way volatility and error correlations are
investigated between real estate and stock price index returns in Australia, Hong
Kong, Japan, Singapore and the US. The results provide an important finding for
volatility correlation in Australia and Hong Kong, while the findings of error corre-
lation are significant in Australia only. Both, one-way volatility and error correlation
found to be important only in Australia.

5
In Appendix and in the main body of the text we cite the authors that are related with the construction
of these two models that are used here.
6
The results are available from authors upon request for space considerations. In Appendix, we provide
the mathematical equations for the constrained GARCH‑BEKK model.

13
Fractional Integration and Volatility Transmission Between… 955

The difference between the two periods, pre-crisis and crisis is that while in the
pre-crisis period both volatility and error correlation were important in Japan, now
are significant in Australia.
The 2010/2011 period in the post-crisis years indicate that one-way volatility cor-
relation is significant in Hong-Kong, Singapore and the US between real estate and
stock price index returns. The respective error correlation is significant in Hong-
Kong and Japan. Results, both for one-way volatility and error correlation found to
be significant in Hong-Kong only.
We observe that while there are similarities in the above three periods with regard
to the one-way volatility and error correlation between the real estate and stock price
index returns, in general, there are differences in the contemporaneous impact of
volatility and error correlations on the five countries under investigation.

Nonlinear Volatility Spillovers Between Real Estate and Stock

Markets7

We analyse the volatility and error spillovers between real estate and stock markets
for the full period under investigation, 2/1/1990–13/6/2018. The transmission of
volatility from real estate to stock index was found to be significant in Australia,
Hong-Kong, Japan and Singapore, while the opposite direction from the stock index
to real estate returns is significant in Hong-Kong, Singapore and the US. We observe
that while the US transmits non-linear news from the stock index to its real estate
the opposite does not happen. However, the other two markets, Hong-Kong and
Singapore provide bilateral volatility spillovers between the real estate and stock
price index returns. This means that these two markets of real estate and stock index
are somehow integrated, while in the US, Australia and Japan the two markets are
somehow segmented.
In line with the error transmission between these two markets, the results seem to
provide support for integration for Australia and Singapore and segmentation for the
US, Japan and Hong-Kong. This means that news reach these markets and make the
diversification process very important for investors as noise affects very importantly
the US, Japan and Hong-Kong. As for the other two markets, Australia and Singa-
pore, we can claim that found to be less influential to noise as are more efficient.

Fractional Integration for Real Estate and Stock Price Indexes8

The results of (d) the fractional integration parameter of the fractional integrated
generalized autoregressive conditional heteroskedastic model indicate that both mar-
kets of real estate and stock index in the US are stationary. In addition, Japanese

7
The results are available from authors upon request for space considerations. In Appendix, we provide
the mathematical equations for the full GARCH‑BEKK model.
8
The results are available from authors upon request for space considerations. In Appendix, we provide
the mathematical equations for the FIGARCH model.

13
956 M. I. Kyriakou et al.

real estate market displays a marginally long-term reverting behavior (0.498) while
the results for the stock index point to stationary series (0.641). As for the rest of
markets (Australia, Hong-Kong and Singapore) is long-term reverting, meaning that
they are non-stationary. In terms of parameter significance, we support that all the
fractional integrated parameters (d) were significant for both markets of investiga-
tion for the full period under examination.

Conclusions and Policy Implications

This paper provides an empirical analysis of the common order of fractional inte-
gration of volatility process of real estate and stock markets in two of the G7 coun-
tries namely UK and Germany. The results indicate that there are volatility spillo-
vers in Germany and in the UK. The robustness results of the HYGARCH-BEKK
approach confirm the findings of the initial FIGARCH-BEKK methodology, pro-
viding support to the accuracy of our methodology. The robust HYGARCH-BEKK
and VECH-HYGARCH approaches capture the transmission in the UK and Ger-
many in the whole period and their correlation during the global financial crisis of
2008/2009 years, respectively. In addition, the constrained GARCH-BEKK, the full
GARCH-BEKK and the FIGARCH models capture volatility correlations during the
financial crisis period and other normal periods, volatility spillovers and fractional
integration in the full period of investigation in countries, such as Australia, Hong-
Kong, Japan, Singapore and the US.
Our findings regarding the two markets are fractionally segmented in the UK and
are integrated in Germany might influence regulators on how they will face the new
challenges which might arise from anomalies (such as speculation and arbitrage)
between the two markets. Finally, it is worth mentioning that the absence of com-
mon order of fractional integration in the UK for the two markets provides opportu-
nities for portfolio risk diversification (Wilson et al., 1996).

Appendix

A1. The FIGARCH-BEKK approach is modeled as:

( )
Φ(L)(1 − L)d ∗ Ut = CC� + 1 − AA� (L) ∗ Vt <=>

where, Vt = Ut − Ht
( ) ( )
Φ(L)(1 − L)d ∗ Ut = CC� + 1 − AA� (L) ∗ Ut − Ht <=>
Φ(L)(1 − L)d ∗ Ut = CC� + Ut − AA� (L)Ut − Ht + AA� (L)Ht <=>
Ht = CC� + AA� (L)Ht − AA� (L)Ut + Ut − Φ(L)(1 − L)d ∗ Ut <=>
Ht = CC� + AA� (L)Ht − AA� (L)Ut + Ut − UFILTERt <=>
Ht = CC� + AH t (L)A� − AU t (L)A� + BU t B� − UFILTERt <=>
Ht = CC� + AH t−1 A� − AU t−1 A� + BU t B� − QU t−2 Q� − UFILTERt

13
Fractional Integration and Volatility Transmission Between… 957

where,

UFILTERt = Φ(L)(1 − L)d ∗ Ut

Our FIGARCH-BEKK (1, d, 2) model takes the following form:

� � � � � �
Ht = CC + A Ht−1 A + BU t 2 B − AU 2t−1 A − QU 2t−2 Q − KUFILTERt K (11)

where,
( ) ( ) ( )�
� 𝜅11 0 (1 − L)d1 0 𝜅11 0
KUFILTERt K = ∗ ∗ Ut ∗
0 𝜅22 0 (1 − L)d2 0 𝜅22

From the above it follows naturally to test the hypothesis ­d1 = ­d2 within this
framework.
Baba et al. (1989) developed the GARCH-BEKK (1, 1) model as follows:
h11,t = ω1 + α211 ∗ ε21,t−1 + 2 ∗ β11 ∗ β21 ∗ h1,t−1 ∗ h2,t−1 + α221 ∗ ε22,t−1
h22,t = ω1 + α212 ∗ ε21,t−1 + 2 ∗ β22 ∗ β12 ∗ h1,t−1 ∗ h2,t−1 + α222 ∗ ε22,t−1
h12,t = ω12 + α11 ∗ α12 ∗ ε21,t−1 + (β21 ∗ +β12 + β11 ∗ β22 ) ∗ h1,t−1 ∗ h2,t−1 + α21 ∗ α22 ∗ ε22,t−1
(12)
We extend the multivariate GARCH-BEKK (1, 1) model to the FIGARCH-
BEKK (1, d, 1) motivated by two specifications:

1. The variance–covariance matrix is positive definite.

2. Stationarity is ensured by restrictions in the variance–covariance matrix.

The bivariate FIGARCH-BEKK (1, d, 1) model may be represented as follows:

hjj,t = (λjj + εj,t ∗ λij + εi,t )2 ∗ (L) + [ωj ∕(1 − βjj (1)) + (ωj ∕1 − βij (1))] <=>
hjj,t = (λjj ∗ +εj,t ∗ λij ∗ εi,t )2 ∗ (L) + [2ωj ∕(1 + βij βjj ((1))
(13)
h12,t = ω12 + α11 ∗ α12 ∗ ε21,t−1 + (β21 ∗ +β12 + β11 ∗ β22 ) ∗ h1,t−1 ∗ h2,t−1 + α21 ∗ α22 ∗ ε22,t−1
(14)
It follows from the results in Bollerslev and Mikkelsen (1996) that positive
definiteness in the bivariate diagonal FIGARCH-BEKK (1, d, 1) model is ensured
if

λjj = 1 − {[Φjj (L)(1 − L)dj ]∕[1 − βjj (L)]}

( ) [ ( )]
βjj − dj ≤ (1∕3) 2 − dj , dj Φjj − (1∕2) 1 − dj ≤ βjj (Φjj − βjj + dj )

and

λjj,t = 1 − {[Φij (L)(1 − L)dj ]∕[1 − βij (L)]}

13
958 M. I. Kyriakou et al.

( ) [ ( )]
βjj − dj ≤ (1∕3) 2 − dj , dj Φij − (1∕2) 1 − dj ≤ βij (Φij − βij + dj (15)

The above processes are stationary for all 0 ≤ ­dj ≤ 1, and j = 1, 2.

A2. We also model real estate and stock market returns with long memory in
variance in a bivariate setting. The extension of the simple VECH-HYGARCH vari-
ance equation is as follows:
( ) ( ( ))
h11,t = c11 ∗ 1 − 𝛽11 + 𝛽11 ∗ h11,t−1 + 𝛼11 ∗ 𝜀211,t − 𝛽11 − 1 − 𝛼11 ∗ 𝛿11 ) ∗ 𝜀211,t−1 −
𝛼11 ∗ ufilter11,t + 𝛼11 ∗ 𝛿11 ∗ ufilter11,t−1
(16a)
( ) ( ( ))
h12,t = c12 ∗ 1 − 𝛽12 + 𝛽12 ∗ h12,t−1 + 𝛼12 ∗ 𝜀212,t − 𝛽12 − 1 − 𝛼12 ∗ 𝛿12 ) ∗ 𝜀212,t−1 −
𝛼12 ∗ ufilter12,t + 𝛼12 ∗ 𝛿12 ∗ ufilter12,t−1
(16b)
( ) ( ( ))
h22,t = c22 ∗ 1 − 𝛽22 + 𝛽22 ∗ h22,t−1 + 𝛼22 ∗ 𝜀222,t − 𝛽22 − 1 − 𝛼22 ∗ 𝛿22 ) ∗ 𝜀222,t−1 −
𝛼22 ∗ ufilter22,t + 𝛼22 ∗ 𝛿22 ∗ ufilter22,t−1
(16c)
where,

α11 ∗ uf ilter 11,t = α11 (1 − L)d ε211,t

α22 ∗ uf ilter 22,t = α22 (1 − L)d ε222,t
α12 ∗ uf ilter 12,t = α12 (1 − L)d ε212,t

and

α11 ∗ δ11 ∗ uf ilter 11,t−1 = α11 δ11 (1 − L)d ε211,t −1

α22 ∗ δ22 ∗ uf ilter 22,t−1 = α22 δ22 (1 − L)d ε222,t −1
α12 ∗ δ12 ∗ uf ilter 12,t−1 = α12 δ12 (1 − L)d ε212,t −1

A3. The return equation of each country’s (Australia, Hong Kong, Japan, Singa-
pore and the US) real estate and stock price indexes under study is influenced by the
constant and previous day’s returns and has the following form for the constrained
GARCH-BEKK model:
Ri,t= b0 + b1 ∗ Ri,t−1 + ut |Ωt−1 ∼ N(0, Ht )fori = 1, 2 (17)

ui,t = Ri,t − bi fori = 1, 2 (18)

where, Ri,t is the real estate or stock price return for the five countries under study.
bi is the martingale constant drift for real estate or stock price index returns.
Next, we apply the two-variable constrained and full GARCH-BEKK model
(Engle & Kroner, 1995) for the variance as:

13
Fractional Integration and Volatility Transmission Between… 959

�
(19)
� � � �
Ht = CC + A Ht−1 A + B 𝜀t−1 ∗ 𝜀1t−1 ∗ 𝜀t−1 B

where,
Ht−1 is the volatility vector. AandA are the usual and the transposed constrained
′

term respectively. 𝜀t is the error term. CandC are the constant constrained vector
′

terms, the first is the usual one and the second is the transposed term. BandB are the
′

error coefficient constrained vectors, the first is the usual one and the second is the
transposed term.
In the constrained GARCH-BEKK model some of the variance’s cross correla-
tions were omitted as they have been set equal to zero. However, the full version of
the GARCH-BEKK model has all the variance parameters without setting zero some
of the cross-product correlations. This is the difference between these two models as
applied on the article.
The parameters of the two-variable systems are estimated by computing the con-
ditional log-likelihood function for each time period as:
1 1 �
Lt (Θ) = −log2π − log||Ht+1 || = E(𝜀t ) (Θ)Ht−1 (Θ)E(𝜀t )(Θ)
2 2

T
∑
andLt (Θ) = Lt (Θ) (20)
t=1

where, Θ is the vector of all volatility and error estimations parameters. The numer-
ical maximization of the log-likelihood function follows the BHHH or the BFGS
algorithm which accounts for the maximum likelihood estimates.
A4. Following Cotter and Stevenson (2006) we believe that the FIGARCH(1,d,1)
model best captures the volatility in the real estate and also in stock price markets.
The conditional variance of the FIGARCH (1,d,1) assumes the following form:
Rt= b0 + b1 ∗ Ri,t−1 + ut (21)

ut = Rt − b0 (22)

𝜎t2 = c + 𝛽𝜎t−1
2
+ [1 − 𝛽L − (1 − eL)(1 − L)d ]𝜀2t (23)

The FIGARCH (p,d,q) model contains two different models for two different
values of d. Taking the value 0 to d we get the covariance-stationary GARCH(p,q)
model while the IGARCH model results from d = 1. Values of d vary between 1 and
0 allowing us to account for the long-term dependence in the conditional variance.
If 0 < d < 0.5, the series are long-term reverting with respect to covariance, and if
0.5 < d < 1, the series are then stationary, however the shocks die away in the short-
run rather than in the long-run.
The long memory volatility model, the Fractional Integrated GARCH
(FIGARCH), developed by Baillie et al. (1996) who claim that the FIGARCH

13
960 M. I. Kyriakou et al.

(p,d,q) model can capture the long memory of financial volatility for daily equity
returns through the fractional differencing parameter (d).

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Authors and Affiliations

Maria I. Kyriakou1 · Athanasios Koulakiotis2 · Apostolos Kiohos3 ·

Vassilios Babalos4
Athanasios Koulakiotis
akoulakiotis@gmail.com
Apostolos Kiohos
akiohos@uom.gr
Vassilios Babalos
v.babalos@teipel.gr
1
Department of Economics, International Hellenic University, Serres, Greece
2
Department of Balkan, Slavic and Oriental Studies, University of Macedonia, Egnatia 156,
54006 Thessaloniki, Greece
3
Department of International and European Studies, University of Macedonia, Egnatia 156,
54006 Thessaloniki, Greece
4
Department of Accounting & Finance, University of Peloponnese, Kalamata, Greece

13