A New Factor Model for REIT Returns
43 Pages Posted: 11 Jan 2023
Date Written: January 11, 2023
Abstract
We propose a new conditional factor model to explain the cross-section of REIT returns. Using the instrumented principal component analysis (IPCA) approach, we extract five latent factors and form a conditional factor model, which outperforms traditional factor models in explaining the cross-section of REIT returns. We further map the latent factors with REIT characteristics and identify firm size, operating cash flows, earnings-to-price ratio, dividend yield, momentum, and REIT-type dummies as the most important contributors. Lastly, we provide economic rationales for the latent factors.
Keywords: REIT Return, Conditional Factor Model, IPCA Approach
JEL Classification: G10, G11, G12, R30
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