Tracking the Evolution of Idiosyncratic Risk and Cross-Sectional Expected Returns for US REITs

Date

2014-04-01

Author

Cakici, Nusret
Erol, Işıl
Tirtiroglu, Dogan

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This paper adopts the methodology in Bali and Cakici (Journal of Financial & Quantitative Analysis, 43, 29-58, 2008) in tracking the evolution of the relation between equity REITs' idiosyncratic risk and their cross-sectional expected returns between 1981 and 2010. In addition to the full sample period, we study this relation for (i) January 1981-December 1992, (ii) January 1993-September 2001, (iii) November 2001-August 2008 and (iv) November 2001-December 2010 and produce empirical results for (i) all sample REITs, (ii) REITs with a price greater than $10 or (iii) REITs with a price greater than $5. Each period represents different dynamics (including the Global Financial Crisis) in the life of the REIT industry and leads to a different hypothesis. Further, we present comparative results based on the Fama-French 3- and 4-factor models. Overall, we document a negative relation between idiosyncratic risk and cross-sectional expected returns and demonstrate that this negative relation changes over time. These findings amplify the "idiosyncratic volatility puzzle," as reported in the recent finance literature. Interestingly, REITs with a price of $5-to-$10 do well in 2009 and 2010. Further, the momentum factor appears to be influential since the first-ever listing of a REIT in the S&P500 Index in early October 2001.

Subject Keywords

Economics and Econometrics, Accounting, Finance, Urban Studies

URI

https://hdl.handle.net/11511/57805

Journal

JOURNAL OF REAL ESTATE FINANCE AND ECONOMICS

DOI

https://doi.org/10.1007/s11146-013-9410-7

Collections

Department of Economics, Article

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Citation Formats

N. Cakici, I. Erol, and D. Tirtiroglu, “Tracking the Evolution of Idiosyncratic Risk and Cross-Sectional Expected Returns for US REITs,” JOURNAL OF REAL ESTATE FINANCE AND ECONOMICS, pp. 415–440, 2014, Accessed: 00, 2020. [Online]. Available: https://hdl.handle.net/11511/57805.