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Extrapolation Theory and the Pricing of REIT Stocks

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Author Info

  • Joseph T.L. Ooi

    ()
    (Department of Real Estate, School of Design and Environment, National University of Singapore, 4 Architecture Drive, Singapore 117 566)

  • James R. Webb

    ()
    (Department of Finance, College of Business, Cleveland State University, Cleveland, Ohio 44115)

  • Dingding Zhou

    ()
    (Department of Real Estate, School of Design and Environment, National University of Singapore, 4 Architecture Drive, Singapore 117 566)

Abstract

This paper is the winner of the best paper on Real Estate Investment Trusts award (sponsored by the National Association of Real Estate Investment Trusts (NAREIT)] presented at the 2005 American Real Estate Society Annual Meeting. This study evaluates the investment prospects of value stocks in the real estate investment trust (REIT) market. Value stocks are defined as those that carry low prices relative to their earnings, dividends, book assets, or other measures of fundamental value. The empirical results show that from 1990 onwards, value REITs provide superior returns without exposing investors to higher risks. The evidence is consistent with the extrapolation theory, which attributes the mispricing to investors over extrapolating past corporate results into the future. Interestingly, the findings reveal that such extrapolation is asymmetric in the REIT market. While value REITs are underpriced in accordance with the extrapolation theory, no evidence is found that growth REITs are overpriced. The value anomaly also exhibited several temporal traits. Firstly, the value premium varies over time. Secondly, the magnitude of the premium is inversely associated with the market performance. Finally, the value anomaly is not evident in the pricing of REITs in the 1980s.

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File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol29n01/02.27_56.pdf
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Bibliographic Info

Article provided by American Real Estate Society in its journal journal of Real Estate Research.

Volume (Year): 29 (2007)
Issue (Month): 1 ()
Pages: 27-56

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Handle: RePEc:jre:issued:v:29:n:1:2007:p:27-56

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Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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Web page: http://www.aresnet.org/

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Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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Cited by:
  1. Jonathan Wiley, 2014. "Illiquidity Risk in Non-Listed Funds: Evidence from REIT Fund Exits and Redemption Suspensions," The Journal of Real Estate Finance and Economics, Springer, vol. 49(2), pages 205-236, August.
  2. Joseph Ooi & Jingliang Wang & James Webb, 2009. "Idiosyncratic Risk and REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 38(4), pages 420-442, May.
  3. Jaakko Niskanen & Heidi Falkenbach, 2011. "Liquidity of European real estate equities: REITs and REOCs," International Journal of Strategic Property Management, Taylor & Francis Journals, vol. 16(2), pages 173-187, May.

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