Predicting the behaviour of Australian ESG REITs using Markov chain analysis

The purpose of this paper is to present the use of Markov chain to predict the behaviour of Australian real estate investment trusts (REITs) that are more highly valued in the areas of environmental, social and governance (ESG).

For the empirical analysis, states is defined as the price interval between 10-day moving averages and daily closing prices. A total of 18 Australian ESG REITs were analysed.

The results show that there is inconsistency in the probabilities obtained for REIT prices across all four states: 1 (= −$0.05), 2 ( < −$0.05 to < $0.05], 3 ($0.05 < to = $0.1] and 4 ( > $0.1). The findings suggest that price movements are occurring in a random fashion and that ESG REITs do not necessarily have more superior performance.

The scope of analysis is only from 2008 to 2014. This is attributed to the availability of the Experts in Responsible Investment Services dataset, which is used to determine the “greenness” of Australian REITs.

This research is original, not just in terms of the scope of analysis but also the methodology presented has not been applied to analyse REITs data.