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

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  • Colin Lizieri
  • Stephen Satchell
  • Qi Zhang

Abstract

Multifactor approaches to real estate returns have emphasized a macro-variables approach in preference to the latent factor approach originally used in arbitrage pricing theory. Use of high-frequency data, trading strategies and growing emphasis on the risks of extreme events makes the macrovariable procedure problematic. This article explores an alternative to the principal components analysis approach: independent components analysis (ICA). ICA seeks independence and maximizes a chosen risk parameter. We apply an ICA procedure based on a kurtosis maximization algorithm to real estate investment trust (REIT) data. The results show that ICA successfully captures kurtosis characteristics of REIT returns, offering possibilities for developing of risk management strategies that are sensitive to extreme events and tail distributions, augmenting traditional mean-variance approaches. Copyright 2007 American Real Estate and Urban Economics Association

Suggested Citation

  • 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, vol. 35(4), pages 569-598, December.
  • Handle: RePEc:bla:reesec:v:35:y:2007:i:4:p:569-598
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    References listed on IDEAS

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    1. John Knight & Colin Lizieri & Stephen Satchell, 2005. "Diversification When It Hurts? The Joint Distributions of Real Estate and Equity Markets," Real Estate & Planning Working Papers rep-wp2005-16, Henley Business School, Reading University.
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    1. repec:kap:jrefec:v:56:y:2018:i:2:d:10.1007_s11146-016-9593-9 is not listed on IDEAS
    2. John Cotter & Richard Roll, 2010. "A Comparative Anatomy of REITs and Residential Real Estate Indexes: Returns, Risks and Distributional Characteristics," Working Papers 201008, Geary Institute, University College Dublin.
    3. repec:bla:abacus:v:53:y:2017:i:3:p:319-348 is not listed on IDEAS
    4. Chang, Kuang-Liang, 2010. "House price dynamics, conditional higher-order moments, and density forecasts," Economic Modelling, Elsevier, vol. 27(5), pages 1029-1039, September.

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