Are diversification benefits obtainable within the same asset class? New evidence from Malaysian Islamic REITS

Although real estate is believed to be the steady element of a portfolio, volatilities during the global financial crisis has thrown off its “defensive stock” status in terms of optimizing portfolio benefit. Evidence from past research have revealed the same for the Real Estate Investment Trust (REIT) in Malaysia. This paper examines the volatility and stability of the REITs in Malaysia (MREITs), particularly analyzing the correlations between the islamic REITs and their conventional counterparts. We further observe the existence of contagion effects between these assets to ascertain whether the islamic REITs are led by the more established conventional REITs. The DCC-MGARCH model is applied to study the volatilities and correlations within this asset class. We also use the wavelet coherence methodology to see the contagion effects between the REITs, within a time frequency domain. Our contribution to the scarce literature on Islamic REITs is the analysis of time varying correlations from a sector-related perspective, and explaining interdependencies in the time domain as well as the frequency domain. Our findings show that the Malaysian REITs have a long run fundamental relationship with each other, but are independently moving within their respective sectors in the shorter term. The results imply that diversification benefits are not hindered as long as the MREITs held in the portfolio belong to different sectors. Most importantly, although the Shariah (Islamic law) investor may be limited in the selection of investment assets, investing in all three islamic MREITs concurrently will not increase the riskiness of the portfolio.