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Tracking the Evolution of Idiosyncratic Risk and Cross-Sectional Expected Returns for US REITs

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  • Nusret Cakici
  • Isil Erol
  • Dogan Tirtiroglu

Abstract

This paper adopts the methodology in Bali and Cakici (Journal of Financial & Quantitative Analysis, 43, 29–58, 2008 ) in tracking the evolution of the relation between equity REITs’ idiosyncratic risk and their cross-sectional expected returns between 1981 and 2010. In addition to the full sample period, we study this relation for (i) January 1981–December 1992, (ii) January 1993–September 2001, (iii) November 2001–August 2008 and (iv) November 2001–December 2010 and produce empirical results for (i) all sample REITs, (ii) REITs with a price greater than $10 or (iii) REITs with a price greater than $5. Each period represents different dynamics (including the Global Financial Crisis) in the life of the REIT industry and leads to a different hypothesis. Further, we present comparative results based on the Fama-French 3- and 4-factor models. Overall, we document a negative relation between idiosyncratic risk and cross-sectional expected returns and demonstrate that this negative relation changes over time. These findings amplify the “idiosyncratic volatility puzzle,” as reported in the recent finance literature. Interestingly, REITs with a price of $5-to-$10 do well in 2009 and 2010. Further, the momentum factor appears to be influential since the first-ever listing of a REIT in the S&P500 Index in early October 2001. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Nusret Cakici & Isil Erol & Dogan Tirtiroglu, 2014. "Tracking the Evolution of Idiosyncratic Risk and Cross-Sectional Expected Returns for US REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 48(3), pages 415-440, April.
    • Handle: RePEc:kap:jrefec:v:48:y:2014:i:3:p:415-440
    DOI: 10.1007/s11146-013-9410-7
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    Cited by:

    1. Zhilan Feng & Stephen M. Miller & Dogan Tirtiroglu, 2020. "The Bennet Decomposition and Predictability of the U.S. REITs’ Profitability," Working papers 2020-11, University of Connecticut, Department of Economics.
    2. Steffen Westermann & Scott J. Niblock & Michael A. Kortt, 2018. "A Review of Corporate Social Responsibility and Real Estate Investment Trust Studies: An Australian Perspective," Economic Papers, The Economic Society of Australia, vol. 37(1), pages 92-110, March.
    3. J. Andrew Hansz & Ying Zhang & Tingyu Zhou, 2017. "An Investigation into the Substitutability of Equity and Mortgage REITs in Real Estate Portfolios," The Journal of Real Estate Finance and Economics, Springer, vol. 54(3), pages 338-364, April.
    4. Jianfu Shen, 2021. "Distress Risk and Stock Returns on Equity REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 62(3), pages 455-480, April.
    5. Jianfu Shen & Eddie C.M. Hui & Kwokyuen Fan, 2021. "The Beta Anomaly in the REIT Market," The Journal of Real Estate Finance and Economics, Springer, vol. 63(3), pages 414-436, October.
    6. Dogan Tirtiroglu & Thu Ha Nguyen & Ercan Tirtiroglu & Tan Cheng Wee, 2017. "REITs, Growth Options and Beta," The Journal of Real Estate Finance and Economics, Springer, vol. 55(3), pages 370-394, October.
    7. Zhilan Feng & Zhilu Lin & Wentao Wu, 2022. "CEO Influence on Funds from Operations (FFO) Adjustment for Real Estate Investment Trusts (REITs)," The Journal of Real Estate Finance and Economics, Springer, vol. 65(3), pages 524-547, October.

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    More about this item

    Keywords

    Idiosyncratic risk; Expected returns; REITs; GFC; REIT Maturity Era; G10; G11; G12;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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