Liquidity , Return , and Order Flow Linkages Between REITs and the Stock Market

Liquidity, Return, and Order Flow Dynamics Linkages Between REITs and the Stock Market This paper explores liquidity and order flow spillovers across NYSE stocks and real estate investment trusts (REITs). Impulse response functions and Granger causality tests indicate the existence of persistent liquidity spillovers running from REITs to nonREITs. Specifically, REIT liquidity indicators are forecastable from non-REIT ones, at both daily and monthly horizons. While REIT prices appear to be set efficiently in that neither REIT nor non-REIT order flows forecast REIT returns, we find that order flows and returns in the stock market negatively forecast REIT order flows. This result is consistent with the notion that real estate markets are viewed as substitute investments for the stock market, which causes down-moves in the stock market to increase money flows to the REIT market.