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An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market

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  • Prashant Das
  • Julia Freybote

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  • Gianluca Marcato

Abstract

Institutional investors such as pension funds or insurance companies commonly invest in the unsecuritized and securitized real estate market. We investigate how institutional investor sentiment in the commercial real estate market affects institutional trading behavior in the REIT market and subsequently asset pricing. In particular, we test two alternative theories - flight to liquidity and style investing theory - to explain the sentiment-induced trading behavior of institutional investors in the REIT market for the pre-crisis (2002–2006), crisis (2007–2009) and post-crisis (2010–2012) period. We find that the applicability of either theory depends on economic conditions. In the pre-crisis period institutional investors switched capital in and out of REITs based on their sentiment in the private market (style investing). However, in the crisis period institutional investors switched capital from the illiquid private market to the more liquid REIT market (flight to liquidity). The flight to more liquid REITs continued into the post-crisis to a lesser extent and suggests that the financial crisis has changed institutional investment behavior. Our findings hold across different groups of REITs (e.g. high and low institutional ownership, S&P and non-S&P REITs) and property types. We also find that institutional real estate investor sentiment introduces a non-fundamental component into REIT pricing. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Prashant Das & Julia Freybote & Gianluca Marcato, 2015. "An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market," The Journal of Real Estate Finance and Economics, Springer, vol. 51(2), pages 160-189, August.
  • Handle: RePEc:kap:jrefec:v:51:y:2015:i:2:p:160-189
    DOI: 10.1007/s11146-014-9490-z
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    Cited by:

    1. Steffen Heinig & Anupam Nanda & Sotiris Tsolacos, 2016. "Which Sentiment Indicators Matter? An Analysis of the European Commercial Real Estate Market," ICMA Centre Discussion Papers in Finance icma-dp2016-04, Henley Business School, Reading University.
    2. Ian Koetsier & Jacob Bikker, 2018. "Herding behavior of Dutch pension funds in asset class investments," DNB Working Papers 602, Netherlands Central Bank, Research Department.

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