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

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Author Info
Colin Lizieri
Stephen Satchell
Qi Zhang

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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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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6229.2007.00201.x
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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. 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. [Downloadable!] (restricted)
  2. K. C. Chan & Patric H. Hendershott & Anthony B. Sanders, 1990. "Risk and Return on Real Estate: Evidence from Equity REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 431-452. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
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