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The Underlying Return Generating Factors for REIT Returns: An Application of Independent Component Analysis

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Author Info

  • Colin Lizieri

    ()
    (Department of Real Estate & Planning, University of Reading)

  • Stephen Satchell
  • Qi Zhang

Abstract

Multi-factor approaches to analysis of real estate returns have, since the pioneering work of Chan, Hendershott and Sanders (1990), emphasised a macro-variables approach in preference to the latent factor approach that formed the original basis of the arbitrage pricing theory. With increasing use of high frequency data and trading strategies and with a growing emphasis on the risks of extreme events, the macro-variable procedure has some deficiencies. This paper explores a third way, with the use of an alternative to the standard principal components approach – independent components analysis (ICA). ICA seeks higher moment independence and maximises in relation to a chosen risk parameter. We apply an ICA based on kurtosis maximisation to weekly US REIT data using a kurtosis maximising algorithm. The results show that ICA is successful in capturing the kurtosis characteristics of REIT returns, offering possibilities for the development of risk management strategies that are sensitive to extreme events and tail distributions.

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File URL: http://www.henley.reading.ac.uk/rep/fulltxt/1206.pdf
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Bibliographic Info

Paper provided by Henley Business School, Reading University in its series Real Estate & Planning Working Papers with number rep-wp2006-12.

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Length: 26 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:rdg:repxwp:rep-wp2006-12

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Related research

Keywords: Real Estate Returns; REIT; ICA; Independent Component Analysis;

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References

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  1. Su-Jane Chen & Cheng-Ho Hsieh & Bradford D. Jordan, 1997. "Real Estate and the Arbitrage Pricing Theory: Macrovariables vs. Derived Factors," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 506-523.
  2. Colin Lizieri & Charles Ward, 2000. "Commercial Real Estate Return Distributions: A Review Of Literature And Empirical Evidence," Real Estate & Planning Working Papers rep-wp2000-01, Henley Business School, Reading University.
  3. K. C. Chan & Patric H. Hendershott & Anthony B. Sanders, 1990. "Risk and Return on Real Estate: Evidence from Equity REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 431-452.
  4. Sheridan Titman & Arthur Warga, 1986. "Risk and the Performance of Real Estate Investment Trusts: A Multiple Index Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 14(3), pages 414-431.
  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, vol. 10(3), pages 225-59, May.
  6. Downs, David H, 2000. "Assessing the Real Estate Pricing Puzzle: A Diagnostic Application of the Stochastic Discounting Factor to the Distribution of REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 20(2), pages 155-75, March.
  7. Foort HAMELINK & Martin HOESLI, 2003. "Maximum Drawdown and the Allocation to Real Estate," FAME Research Paper Series rp87, International Center for Financial Asset Management and Engineering.
  8. Chan, Su Han & Erickson, John & Wang, Ko, 2002. "Real Estate Investment Trusts: Structure: Structure, Performance, and Investment Opportunities," OUP Catalogue, Oxford University Press, number 9780195155341, September.
  9. David C. Ling & Andy Naranjo, 1999. "The Integration of Commercial Real Estate Markets and Stock Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(3), pages 483-515.
  10. Chen, Su-Jane & Jordan, Bradford D., 1993. "Some empirical tests in the arbitrage pricing theory: Macro variables vs. derived factors," Journal of Banking & Finance, Elsevier, vol. 17(1), pages 65-89, February.
  11. Ling, David C & Naranjo, Andy & Ryngaert, Michael D, 2000. "The Predictability of Equity REIT Returns: Time Variation and Economic Significance," The Journal of Real Estate Finance and Economics, Springer, vol. 20(2), pages 117-36, March.
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Cited by:
  1. Chang, Kuang-Liang, 2010. "House price dynamics, conditional higher-order moments, and density forecasts," Economic Modelling, Elsevier, vol. 27(5), pages 1029-1039, September.
  2. John Cotter & Richard Roll, 2011. "A Comparative Anatomy of REITs and Residential Real Estate Indexes: Returns, Risks and Distributional Characteristics," Papers 1103.5972, arXiv.org.

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