Signal herding and contrarianism in REITs – stock vs fixed income factors

Herding and contrarian (reverse herding) behaviours have received considerable attention in finance studies. The former generally refers to market participants’ behaviour of mimicking the action of others while suppressing their own private information; while agents are seen as contrarians if they ignore their private information about value uncertainty and trade against the trend in the market. Both behaviours can cause price distortion and hence potentially exacerbate the volatility of the financial market. One approach to detect herding (contrarianism) is to see if return dispersions, usually measured by the cross-sectional absolute deviation of returns (CSDA), decrease (increase) non-linearly if the overall market return increase as investors converge towards (against) market consensus. Using this approach, this study focuses on investors’ behaviours in the US equity Real Estate Investment Trust (REIT) market. While both herding and contrarianism are evident in the existing empirical studies in REITs, the explanations for such behaviours are anecdotal. This paper aims to further examine the factors that amplify or reduce such behaviours. We put forward two novel empirical strategies: first, we decompose dispersions in returns due to fundamental stock market factors (i.e., Fama-French factors) and fixed income assets factors. This strategy reflects on the argument that equity REITs have the characteristics of small stock as well those of fixed income assets including direct real estate and bond. Second, we define volatility signals derived from US stock market, treasuries yield (3-month and 10-year), and sentiment measure (CBOE VIX) and investigate such signals induce investors to converge towards or depart from market consensus. Our results are threefold. Firstly, using survivorship-bias free CRSP Ziman REITS daily data for equity REITs from January 1980 to December 2021, our static CSAD models show strong evidence of contrarianism for the whole equity REITs market as well as in all sub-sectors (including Diversified, Healthcare, Industrial/Office, Residential, Retail, and Self-storage) except lodging. Using rolling window specifications, our results show short periods of herding in the 80s and 90s when the industry was relatively new and in 2020 at the beginning of the Covid pandemic, but contrarianism is evident throughout the time period. Once CSAD is dissected into stock and fixed-income elements, neither herding nor contrarianism is evident in stock elements, however volatility signals from VIX and short-term T-bill induce investors to converge towards market consensus, whereas signals from the stock market induce departure from market consensus. In the fixed-income proportion of CSAD, contrarianism is strongly evident, but signals from the stock market reduces such behaviours. Our results imply that investors in the REITs market predominately trade against the market, this could be that they place more emphasis on the market fundamentals related to direct real estate and bonds. Such contrarianism behaviour however, is dampened by informative volatility signals from the macro-economic factors as well as market sentiment.