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

Posted: 22 Mar 2014

See all articles by Nusret Cakici

Nusret Cakici

Fordham University

Isil Erol

Middle East Technical University (METU) - Department of Economics

Dogan Tirtiroglu

Kadir Has University

Date Written: March 20, 2014

Abstract

This paper adopts the methodology in Bali and Cakici (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) 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&P 500 Index in early October 2001.

Keywords: Idiosyncratic risk; Expected returns; REITs; GFC; REIT maturity era

JEL Classification: G10, G11, G12

Suggested Citation

Cakici, Nusret and Erol, Isil and Tirtiroglu, Dogan, Tracking the Evolution of Idiosyncratic Risk and Cross-Sectional Expected Returns for US REITSs (March 20, 2014). Journal of Real Estate Finance and Economics, Vol. 48, No. 3, 2014, Available at SSRN: https://ssrn.com/abstract=2412191

Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)

Isil Erol

Middle East Technical University (METU) - Department of Economics ( email )

Inonu Bulvari
Ankara
Turkey

Dogan Tirtiroglu (Contact Author)

Kadir Has University ( email )

Istanbul
Turkey

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