Real estate risk exposure in the financial sector: international evidence

Abstract

Purpose The aim of this study is to analyze the impact of real estate risks on the dynamics of financial sector stock returns, using a sample of countries across Asia and Oceania, Europe and North America, from January 2000 to December 2024, a period marked by significant crises including the Global Financial Crisis and the COVID-19 pandemic. Design/methodology/approach The wavelet quantile correlation (WQC) is implemented to shed new light on the dynamic real estate risk exposure in the financial sector (including the risk frequency, scale and location) during periods of turmoil and exuberance. With this metric, we can also analyze tail dependence and explore its consequences and implications across different investment horizons, for investors, real estate developers, bankers, policymakers and other stakeholders. Considering the connectedness between the real estate and financial sectors, we propose two factors to measure real estate risk along two complementary dimensions: U.S. real estate risk and domestic real estate risk. Findings Based on the WQC metric, our results separately report U.S. and domestic real estate risk exposures, which significantly affect global financial sector returns across three investment horizons: short-term (4–8 months), mid-term (32–64 months) and long-term (64–128 months). Globally, real estate risk exposure increases with investment horizon, while tail risk declines. Domestic real estate risk exposure is prevalent and higher in Asia, Europe and North America for all investment horizons. As revealed by the quantile analysis, U.S. real estate risk exposure in the financial sector is more significant in U.S. and European countries, whereas Asian countries (particularly Japan) are more affected by domestic real estate risk exposure. Originality/value We develop an international analysis of real estate risk exposure in the financial sector for a sample of 14 countries. We consider two complementary dimensions: U.S. real estate risk and domestic real estate risk, and we use a recently developed econometric methodology, based on WQC. Our results highlight the relative importance of real estate risk exposures in the global financial sector. These findings may inform the calculation of risk-weighted assets by banks, as required under the new 2025 Basel IV framework.