Idiosyncratic risk, market risk and correlation dynamics in the US real estate investment trusts

Liow, Kim Hiang; Addae‐Dapaah, Kwame

doi:10.1016/j.jhe.2010.06.001

Cited by 27 publications

(14 citation statements)

References 25 publications

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“…While the inclusion increases the average adjusted R 2 substantially, neither realised nor idiosyncratic volatility seems to be unconditionally priced in the cross-section of real estate equity returns. This result is in contrast to Chiang et al (2009), Ooi et al (2009), Liow and Addae-Dappah (2010 and DeLisle et al (2011), who show that idiosyncratic volatility is either positively or negatively priced in the cross-section of US REIT returns. However, the results support the conception of the modern portfolio theory and the CAPM in that idiosyncratic risk is diversifiable and that an investor should not be rewarded for being exposed to avoidable risk.…”

Section: Idiosyncratic Riskcontrasting

confidence: 95%

“…Depending on the return frequency used to calculate idiosyncratic risk (daily vs monthly), portfolio or individual stock level data, return weighting procedures, idiosyncratic volatility measures and general model set-up, idiosyncratic risk is found to be either positively, negatively or unrelated to expected stock returns. Concerning the US-REIT market, the studies of Jirasakuldech et al (2009), Chiang et al (2009), Ooi et al (2009), Liow and Addae-Dappah (2010) and DeLisle et al (2011) add to the inconclusive evidence on the pricing of idiosyncratic risk.…”

Section: Introductionmentioning

confidence: 99%

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Idiosyncratic risk and the cross-section of European real estate equity returns

Schulte

2014

Journal of European Real Estate Research

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If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -This study is the first to examine the role of idiosyncratic risk in the pricing of European real estate equities. The capital asset pricing model predicts that in equilibrium, investors should hold the market portfolio. As a result, investors should only be rewarded for carrying undiversifiable systematic risk and not for diversifiable idiosyncratic risk. The study is adding to the growing body of countering studies by first examining time trends of idiosyncratic risk and subsequently the pricing of idiosyncratic risk in European real estate equities. The paper aims to discuss these issues. Design/methodology/approach -The study analyses 293 real estate equities from 16 European capital markets over the 1991-2011 period. The framework of Fama and MacBeth is employed. Regressions of the cross-section of expected equity excess returns on idiosyncratic risk and other firm characteristics such as beta, size, book-to-market equity (BE/ME), momentum, liquidity and co-skewness are performed. Due to recent evidence on the conditional pricing of European real estate equities, the pricing is also investigated using the conditional framework of Pettengill et al. Either realised or expected idiosyncratic volatility forecasted using a set of exponential generalized autoregressive conditional heteroskedasticity models are employed. Findings -The initial analysis of time trends in idiosyncratic risk reveals that while the early 1990s are characterised by both high total and idiosyncratic volatility, a strong downward trend emerged in 1992 which was only interrupted by the burst of the dotcom bubble and the 9/11 attacks along with the global financial and economic crisis. The largest part of total volatility is idiosyncratic and therefore firm-specific in nature. Simple cross-correlations indicate that high beta, small size, high BE/ME, low momentum, low liquidity and high co-skewness equities have higher idiosyncratic risk. While size and BE/ME are priced unconditionally from 1991 to 2011, both measures of idiosyncratic risk fail to achieve significance at reasonable levels. However, once conditioned on the general equity market or real estate equity market, a strong positive relati...

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Section: Idiosyncratic Riskcontrasting

confidence: 95%

Section: Introductionmentioning

confidence: 99%

Idiosyncratic risk and the cross-section of European real estate equity returns

Schulte

2014

Journal of European Real Estate Research

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“…Idiosyncratic risk is important for real estate as investors tend to hold small undiversified portfolios due to the localized and segmented nature of the asset. Clayton and MacKinnon () find that idiosyncratic risk for REITs is large and increasing over time, although Liow and Addae‐Dapaah () note that the recent trend is downwards. REITs have low beta exposures, but this varies across assets and time (Khoo, Hartzell and Hoesli ).…”

Section: Literature Reviewmentioning

confidence: 99%

A Comparative Anatomy of Residential REITs and Private Real Estate Markets: Returns, Risks and Distributional Characteristics

Cotter

Roll

2014

Real Estate Economics

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Real Estate Investment Trusts (REITs) are the only truly liquid assets related to residential real estate investments. We study the behavior of U.S. Residential REITs over the past three decades and document their return characteristics. REITs have somewhat less market risk than equity; their betas against a broad market index average about 0.58. Decomposing their covariances into principal components reveals several strong factors. Residential REIT characteristics differ to some extent from those of the S&P/Case-Shiller (SCS) private real estate markets. This is partly attributable to methods of index construction. Our examination of REITs suggests that investment in residential real estate is far more risky than what might be inferred from the widely followed SCS series. Although the SCS and REITs indicate little support for being able to predict each other, there is strong evidence of self-predictability for the series.Although residential real estate probably represents the dominant fraction of nonhuman capital for most Americans, it is very illiquid. 1 Transaction costs and search costs are high when selling or buying a single-or a multi-family residence. Private residential real estate indexes such as those published by S&P/Case-Shiller R (SCS) are widely followed, but they are reported only monthly and are subject to some unavoidable difficulties. 2 The only truly liquid residential real estate related vehicle with high-frequency observability is the Real Estate Investment Trust (REIT). They are forward-looking market prices resulting from investors' views on the future performance of real estate assets.

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“…However, people find that idiosyncratic risk cannot be entirely removed by diversification in real markets, especially in the property market. Some evidence shows that idiosyncratic risk plays a significant role in explaining the excess risk premium (Liow & Addae-Dapaah, 2010). Leverage and illiquidity, as important characteristics of real estate investment, are responsible for undiversifiable risk.…”

Section: Introductionmentioning

confidence: 99%

“…This paper attempts to examine the spillover effect of idiosyncratic risk in REIT returns to explore the material implications for asset pricing and make a contribution to the knowledge. In addition, many studies have revealed that idiosyncratic risk is a time-varying attribute in REIT markets along with financial fluctuations (Liow & Addae-Dapaah, 2010). In general, the time-varying behaviour of volatility indicates the importance of the diversification of portfolio management at different stages of the of idiosyncratic risk and its spillover with REIT returns; and iii) establishing an asymmetric model to analyse the asymmetric responses of volatility terms.…”

Section: Introductionmentioning

confidence: 99%

Idiosyncratic Risk and Spillover Effect in Reit Returns

Hui

Wang

2018

International Journal of Strategic Property Management

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Nowadays, idiosyncratic risk has substantial impacts on the risk control of portfolio construction. However, little research has been done on the spillover effect of idiosyncratic risk from global markets in REIT returns. A risk-return model is developed to examine the effects of idiosyncratic risk and its spillover on the short-run dynamics of REIT returns in 10 major REIT markets between 2001 and 2014. Variance decomposition provides evidence that idiosyncratic risk exceeds market risk most of the time. The risk-return models demonstrate that the spillover effect of idiosyncratic risk globally played a more significant role than idiosyncratic risk in the return dynamics during the subprime mortgage crisis. Furthermore, we analyse the asymmetric responses of volatility in REIT returns. The results show that the Netherlands is the most strongly preferred market in terms of earning excess returns, while the US market is unique in that the idiosyncratic risk and spillover effect tend to enlarge the fluctuations in REIT returns.

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Idiosyncratic risk, market risk and correlation dynamics in the US real estate investment trusts

Cited by 27 publications

References 25 publications

Idiosyncratic risk and the cross-section of European real estate equity returns

Idiosyncratic risk and the cross-section of European real estate equity returns

A Comparative Anatomy of Residential REITs and Private Real Estate Markets: Returns, Risks and Distributional Characteristics

Idiosyncratic Risk and Spillover Effect in Reit Returns

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