City Research Online

Exploring the non-linear dynamics between Commercial Real Estate and systemic risk

Kladakis, G., Lux, N. ORCID: 0000-0001-6097-8498 & Skouralis, A. (2025). Exploring the non-linear dynamics between Commercial Real Estate and systemic risk. Journal of Empirical Finance, 82, article number 101607. doi: 10.1016/j.jempfin.2025.101607

Abstract

The commercial real estate (CRE) market significantly influences financial stability, given its size, use as collateral, and cyclicality. This study explores macro-financial vulnerabilities arising from the CRE market, revealing that adverse developments in CRE capital values amplify systemic risk across financial sub-sectors, namely, banks, insurance companies and investment trusts, consistent with the collateral channel hypothesis. The CRE and financial markets relationship, however, displays nonlinearities. We introduce a UK CRE Misalignment index which integrates various market indicators to assess deviations from fundamental values in the CRE sector. We find that during market misalignments, the link between systemic risk and CRE growth weakens, suggesting that further property price increases in an overheated market could lead to a bubble and heightened systemic risk, in line with the deviation hypothesis. Finally, we employ a quantile regression model that captures another aspect of this non-linear relationship. We find that positive (negative) developments in the CRE market decrease (increase) the right tail of the historical systemic risk distribution, but CRE variation has a weak impact on the left tail and cannot effectively reduce systemic risk in periods of growth.

Publication Type: Article
Additional Information: This is an open access article distributed under the terms of the Creative Commons CC-BY license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Publisher Keywords: Commercial Real Estate, Systemic Risk, Collateral channel, COVID-19, Quantile regression
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School
Bayes Business School > Faculty of Finance
SWORD Depositor:
[thumbnail of 1-s2.0-S0927539825000295-main.pdf]
Preview
Text - Published Version
Available under License Creative Commons Attribution.

Download (2MB) | Preview

Export

Add to AnyAdd to TwitterAdd to FacebookAdd to LinkedinAdd to PinterestAdd to Email

Downloads

Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login