REITS: Basic networks of global REITs

In financial markets where assets, e.g. equities, are traded simultaneously the main approach to detect similarities and differences in price return patterns is to study correlation (or covariance) matrices. However, correlation matrices lack the notion of hierarchy, an important piece of information useful for investigating the evolution of asset prices.

One way to analyze complex systems, such as financial markets, is by using methods from network science. Based on graph theory, where nodes are linked by edges that represent relationships between nodes, network science provides the tools, such as hierarchical clustering methods, for extracting information about characteristics of hierarchical organisation of correlation matrices. The output of the clustering procedure is a hierarchical tree of the elements of the system.

An interesting attribute of networks is the concept of communities. A community is a set of nodes that are more densely connected to each other than to the rest of the network. The below chart illustrates a simple correlation based network of global real estate securities over the decade ending in 2016 at annual intervals.

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Kania Advisors is an independent research and advisory firm focused exclusively on institutional real assets allocations and investment programmes. We provide advice and solutions to improve outcomes in real assets investment programmes. We conduct detailed industry research and custom studies typically focused on quantitative analysis and provide insights which form a critical part of a client's decision process.