The Sources of Risk Spillovers Among U.S. REITs: Financial Characteristics and Regional Proximity
Real Estate Economics, Forthcoming
49 Pages Posted: 3 Feb 2013 Last revised: 30 Mar 2016
Date Written: February 3, 2013
In this paper, we estimate the risk spillovers among 74 U.S. REITs using the state-dependent sensitivity value-at-risk (SDSVaR) approach. This methodology allows for the quantification of the spillover size as a function of a company’s financial condition (tranquil, normal, and volatile REIT prices). We show that the size of risk spillovers is more than twice as large when REITs are in financial distress and find evidence for the impact of geographical proximity: REITs that have their properties located in close distance to the properties of other REITs show risk spillovers that are on average 33% higher than REITs that have similar properties but at a larger distance. We estimate the risk gradient to decrease nonlinearly and to have zero slope for property distances of more than 250 miles. Our empirical findings provide first empirical evidence on the transmission of risk spillovers from underlying real positions to the securitized level of a company. Specifically, our results highlight the relevance of geographical diversification for REITs and have important implications for the investment and risk management decisions of real estate investors, mortgage lenders, home suppliers, and policy makers.
Keywords: REITs, fundamental value, geographic diversification, information diffusion, risk spillovers, state-dependent sensitivity VaR (SDSVaR)
JEL Classification: G01, G10, R12
Suggested Citation: Suggested Citation