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The Underlying Return-Generating Factors for REIT Returns: An Application of Independent Component Analysis

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  • Colin Lizieri
  • Stephen Satchell
  • Qi Zhang

Abstract

Multifactor approaches to real estate returns have emphasized a macro-variables approach in preference to the latent factor approach originally used in arbitrage pricing theory. Use of high-frequency data, trading strategies and growing emphasis on the risks of extreme events makes the macrovariable procedure problematic. This article explores an alternative to the principal components analysis approach: independent components analysis (ICA). ICA seeks independence and maximizes a chosen risk parameter. We apply an ICA procedure based on a kurtosis maximization algorithm to real estate investment trust (REIT) data. The results show that ICA successfully captures kurtosis characteristics of REIT returns, offering possibilities for developing of risk management strategies that are sensitive to extreme events and tail distributions, augmenting traditional mean-variance approaches. Copyright 2007 American Real Estate and Urban Economics Association

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Bibliographic Info

Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 35 (2007)
Issue (Month): 4 (December)
Pages: 569-598

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Handle: RePEc:bla:reesec:v:35:y:2007:i:4:p:569-598

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  1. Young, Michael S & Graff, Richard A, 1995. "Real Estate Is Not Normal: A Fresh Look at Real Estate Return Distributions," The Journal of Real Estate Finance and Economics, Springer, vol. 10(3), pages 225-59, May.
  2. Ling, David C & Naranjo, Andy & Ryngaert, Michael D, 2000. "The Predictability of Equity REIT Returns: Time Variation and Economic Significance," The Journal of Real Estate Finance and Economics, Springer, vol. 20(2), pages 117-36, March.
  3. K.C. Chan & Patric H. Hendershott & Anthony B. Sanders, 1991. "Risk and Return on Real Estate: Evidence from Equity REITs," NBER Working Papers 3311, National Bureau of Economic Research, Inc.
  4. Foort Hamelink & Martin Hoesli, 2004. "Maximum drawdown and the allocation to real estate," Journal of Property Research, Taylor & Francis Journals, vol. 21(1), pages 5-29, January.
  5. Su-Jane Chen & Cheng-Ho Hsieh & Bradford D. Jordan, 1997. "Real Estate and the Arbitrage Pricing Theory: Macrovariables vs. Derived Factors," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 506-523.
  6. David C. Ling & Andy Naranjo, 1999. "The Integration of Commercial Real Estate Markets and Stock Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(3), pages 483-515.
  7. Colin Lizieri & Charles Ward, 2000. "Commercial Real Estate Return Distributions: A Review Of Literature And Empirical Evidence," Real Estate & Planning Working Papers rep-wp2000-01, Henley Business School, Reading University.
  8. Chan, Su Han & Erickson, John & Wang, Ko, 2002. "Real Estate Investment Trusts: Structure: Structure, Performance, and Investment Opportunities," OUP Catalogue, Oxford University Press, number 9780195155341.
  9. Downs, David H, 2000. "Assessing the Real Estate Pricing Puzzle: A Diagnostic Application of the Stochastic Discounting Factor to the Distribution of REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 20(2), pages 155-75, March.
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Cited by:
  1. John Cotter & Richard Roll, 2011. "A Comparative Anatomy of REITs and Residential Real Estate Indexes: Returns, Risks and Distributional Characteristics," Papers 1103.5972, arXiv.org.
  2. Chang, Kuang-Liang, 2010. "House price dynamics, conditional higher-order moments, and density forecasts," Economic Modelling, Elsevier, vol. 27(5), pages 1029-1039, September.

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