REITs in the decentralized investment industry

Abstract

Existing studies provide conflicting results regarding whether real estate investment trusts (REITs) effectively optimize and diversify institutional portfolios. Based on the style analysis of Sharpe, we extend Liang and McIntosh’s study with a more complete set of asset classes over a longer sample period. We provide additional evidence suggesting that practicing analysts should include REITs as an asset class to optimize their portfolios. Specifically, our results show that the price behavior of REITs is unique and cannot be satisfactorily duplicated by combining equity, fixed‐income securities, and unsecuritized real estate. The time series of the styles on REITs indicates that it is difficult to ex ante produce returns on REITs without diversifying into REITs.

Multivariate Modeling of Daily REIT Volatility

“…The results with regard to the interlinkages with the mainstream capital market assets are intuitive, with small cap and value stocks being far more influential on REITs than the large cap S&P 500 Composite Index. While this is consistent with the literature to have highlighted the similarities between REITs and value stocks in the mid and small cap range, such as Chiang and Lee (2002), a recent paper by Cotter and Stevenson (2004) shows that these findings are sensitive to the frequency of data analyzed. While Stevenson (2002) uses the monthly NAREIT indices, Cotter and Stevenson (2004) use daily data.…”

“…In addition, as few REITs currently can be classified as large cap, the use of a mid-cap value index is also deliberate to avoid any spurious results due to differences in the market capitalization of the constituent stocks in the two indices. A large number of studies have illustrated the linkages between value stocks and REITs, including Chiang and Lee (2002), who illustrate using Style Analysis that Equity REITs can be classified as a combination of value stocks and treasury bills. In addition, Stevenson (2002) in his analysis of volatility spillovers in REITs using monthly data finds strong evidence that value stocks provide more significant influence on REIT volatility than the large cap or growth sectors.…”

Discovering REIT Price Discovery: A New Data Setting

“…The estimates for the SMB factor and the HML factor are quite high and statistically significant at the 1% level. This suggests that, consistent with Chiang and Lee (2002), REITs exhibit the small stock style and the value stock style. These factor exposures are driven by the sensitivities of public real estate returns relative to factor returns.…”

Real Estate Risk Exposure of Equity Real Estate Investment Trusts

“…We conjecture that this style is related to the information role of big-cap REITs in the new REIT era. It is well known that the dominant style of equity REITs is in small, value stocks (Chiang and Lee 2002). If institutional investors trade REITs like small, value stocks in the new REIT era, it is likely that big-cap REITs would show a higher purity of the small-value style because institutional investors invest predominately in big-cap REITs.…”