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A Comparative Anatomy of REITs and Residential Real Estate Indexes: Returns, Risks and Distributional Characteristics

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  • John Cotter
  • Richard Roll

Abstract

Real Estate Investment Trusts (REITs) are the only truly liquid assets related to real estate investments. We study the behavior of U.S. REITs over the past three decades and document their return characteristics. REITs have somewhat less market risk than equity; their betas against a broad market index average about .65. Decomposing their covariances into principal components reveals several strong factors. REIT characteristics differ to some extent from those of the S&P/Case-Shiller (SCS) residential real estate indexes. This is partly attributable to methods of index construction. Our examination of REITs suggests that investment in real estate is far more risky than what might be inferred from the widely-followed SCS series. REITs, unlike SCS series are forward looking, and this helps them in the prediction of SCS returns. REIT forecasts of SCS returns are reasonably precise over a number of periods.

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Paper provided by arXiv.org in its series Papers with number 1103.5972.

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Date of creation: Mar 2011
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Handle: RePEc:arx:papers:1103.5972

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  1. John Cotter & Kevin Dowd, 2011. "Extreme Spectral Risk Measures: An Application to Futures Clearinghouse Margin Requirements," Working Papers, Geary Institute, University College Dublin 200516, Geary Institute, University College Dublin.
  2. Joseph Gyourko & Donald B. Keim, 1992. "What Does the Stock Market Tell Us About Real Estate Returns?," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 20(3), pages 457-485.
  3. Colin Lizieri & Stephen Satchell & Qi Zhang, 2007. "The Underlying Return-Generating Factors for REIT Returns: An Application of Independent Component Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 35(4), pages 569-598, December.
  4. Cotter, John & Stevenson, Simon, 2007. "Modeling Long Memory in REITs," MPRA Paper 3500, University Library of Munich, Germany.
  5. 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, Springer, vol. 10(3), pages 225-59, May.
  6. Chan, Su Han & Erickson, John & Wang, Ko, 2002. "Real Estate Investment Trusts: Structure: Structure, Performance, and Investment Opportunities," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195155341, October.
  7. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
  8. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
  9. Joseph Gyourko & Edward Nelling, 1996. "Systematic Risk and Diversification in the Equity REIT Market," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 24(4), pages 493-515.
  10. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 124(4), pages 1449-1496, November.
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