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

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  • Liow, Kim Hiang
  • Addae-Dapaah, Kwame

Abstract

This study examines total, market and idiosyncratic risk and correlation dynamics using weekly return data on two US REIT firm samples from 1988 to 2008. We find that both market and idiosyncratic variance are time-varying and that idiosyncratic variance represents a dominant component of a REIT firm's total variance. We find a decline in idiosyncratic risk as well as a rise in average REIT correlation during the new REIT era, from 1993 to 2008. This recent downward trend of idiosyncratic risk among REITs is different to the stylized upward trend of idiosyncratic risk among stocks. There is bi-lateral Granger causality between the market and idiosyncratic risks. Finally, we detect a positive relationship between the idiosyncratic risk and expected returns, implying that the risk premium of REITs is positively related to the idiosyncratic risk during the period new REIT era, 1993-2008. Our results have important asset-pricing implications for under-diversified investors.

Suggested Citation

  • Liow, Kim Hiang & Addae-Dapaah, Kwame, 2010. "Idiosyncratic risk, market risk and correlation dynamics in the US real estate investment trusts," Journal of Housing Economics, Elsevier, vol. 19(3), pages 205-218, September.
    • Handle: RePEc:eee:jhouse:v:19:y:2010:i:3:p:205-218
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    1. Abugri, Benjamin A. & Dutta, Sandip, 2014. "Are we overestimating REIT idiosyncratic risk? Analysis of pricing effects and persistence," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 249-259.
    2. Meichi Huang & Chih-Chiang Wu, 2015. "Economic benefits and determinants of extreme dependences between REIT and stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 299-327, February.
    3. Rehman, Mobeen Ur & Shahzad, Syed Jawad Hussain & Ahmad, Nasir & Vo, Xuan Vinh, 2022. "Dependence dynamics of US REITs," International Review of Financial Analysis, Elsevier, vol. 81(C).
    4. Huang, MeiChi & Wu, Chih-Chiang & Liu, Shih-Min & Wu, Chang-Che, 2016. "Facts or fates of investors' losses during crises? Evidence from REIT-stock volatility and tail dependence structures," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 54-71.
    5. John Cotter & Richard Roll, 2015. "A Comparative Anatomy of Residential REITs and Private Real Estate Markets: Returns, Risks and Distributional Characteristics," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(1), pages 209-240, March.

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