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Time Variation of Expected Returns on REITs: Implications for Market Integration and the Financial Crisis

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  • Yuming Li

    (California State University, Fullerton)

Abstract

This article uses a conditional covariance-based three-factor pricing model and a REIT index-enhanced four-factor model to examine the time variation of expected returns on REITs over the period 1972-2013. Although expected returns on equity REITs are highly correlated with their own volatility, the covariances of returns on REITs with the stock market premium, small stock premium and value premium subsume the role of the volatility of REITs in explaining expected returns on REITs. The conditional betas of REITs associated with the stock market premium and the value premium, along with the conditional correlation between the two premiums, are more important than the volatility of the stock market or other factors in explaining the time variation of expected returns on REITs, especially during the recent financial crisis. Tests of asset pricing restrictions add further evidence on the integration of the real estate market with the general stock market.

Suggested Citation

  • Yuming Li, 2016. "Time Variation of Expected Returns on REITs: Implications for Market Integration and the Financial Crisis," Journal of Real Estate Research, American Real Estate Society, vol. 38(3), pages 321-358.
    • Handle: RePEc:jre:issued:v:38:n:3:2016:p:321_358
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    Cited by:

    1. Mário Nuno Mata & Muhammad Najib Razali & Sónia R. Bentes & Isabel Vieira, 2021. "Volatility Spillover Effect of Pan-Asia’s Property Portfolio Markets," Mathematics, MDPI, vol. 9(12), pages 1-20, June.
    2. Odusami, Babatunde O., 2021. "Volatility jumps and their determinants in REIT returns," Journal of Economics and Business, Elsevier, vol. 113(C).

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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