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An Examination of Macroeconomic Effects on the Liquidity of REITs

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  • John Glascock
  • Ran Lu-Andrews

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Abstract

In this research, we investigate the effects of changes in and levels of selected macroeconomic variables on the liquidity of Real Estate Investment Trust (REIT, henceforth) stocks. We study in particular REIT market trading liquidity and REIT funding liquidity. We use debt service coverage ratios, loan-to-value ratios and the number of loans on commercial commitments as proxies for the funding liquidity of REITs. We use Amihud Illiquidity measurement and Turnover Ratio measurement to estimate REIT market trading liquidity. Our results are fourfold: one, funding liquidity is influenced by changes in macroeconomic factors; two, macroeconomic effects are different across phases of the business cycle; three, funding liquidity is significantly positively related to REIT market liquidity (this is supportive of Brunnermeier and Petersen’s Review of Financial Studies, 22:2201–2238 ( 2009 ) findings); and four, these effects vary across economic regimes. A key outcome of this work is that increases in debt to equity reduce market liquidity for REIT stocks. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • John Glascock & Ran Lu-Andrews, 2014. "An Examination of Macroeconomic Effects on the Liquidity of REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 49(1), pages 23-46, July.
  • Handle: RePEc:kap:jrefec:v:49:y:2014:i:1:p:23-46
    DOI: 10.1007/s11146-013-9406-3
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    References listed on IDEAS

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    1. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 54(4), pages 1325-1360, August.
    2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    3. Jensen, Gerald R. & Moorman, Theodore, 2010. "Inter-temporal variation in the illiquidity premium," Journal of Financial Economics, Elsevier, vol. 98(2), pages 338-358, November.
    4. Randi Næs & Johannes A. Skjeltorp & Bernt Arne Ødegard, 2008. "Liquidity and the business cycle," Working Paper 2008/11, Norges Bank.
    5. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    6. Don Bredin & Gerard O’Reilly & Simon Stevenson, 2007. "Monetary Shocks and REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 35(3), pages 315-331, October.
    7. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    8. Lynne B. Sagalyn, 1990. "Real Estate Risk and the Business Cycle: Evidence from Security Markets," Journal of Real Estate Research, American Real Estate Society, vol. 5(2), pages 203-220.
    9. Randi Næs & Johannes A. Skjeltorp & Bernt Arne Ødegaard, 2011. "Stock Market Liquidity and the Business Cycle," Journal of Finance, American Finance Association, vol. 66(1), pages 139-176, February.
    10. Glascock, John L, 1991. "Market Conditions, Risk, and Real Estate Portfolio Returns: Some Empirical Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 4(4), pages 367-373, December.
    11. Laura Xiaolei Liu & Lu Zhang, 2008. "Momentum Profits, Factor Pricing, and Macroeconomic Risk," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2417-2448, November.
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