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

Posted: 26 Aug 2015

See all articles by Prashant Das

Prashant Das

Georgia State University - Department of Real Estate; India China America Institute

Julia Freybote

Portland State University

Gianluca Marcato

Henley Business School - University of Reading

Date Written: August 25, 2015

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.

Keywords: Institutional investor sentiment; Flight to liquidity; Style investing; Asset pricing; Real estate

Suggested Citation

Das, Prashant and Freybote, Julia and Marcato, Gianluca, An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market (August 25, 2015). Journal of Real Estate Finance and Economics, Vol. 51, No. 2, 2015, Available at SSRN: https://ssrn.com/abstract=2650477

Prashant Das

Georgia State University - Department of Real Estate ( email )

P.O. Box 4020
Atlanta, GA 30303-4020
United States

India China America Institute ( email )

1000 Chastain Road, Office BB476
Kennesaw, GA 30144
United States

Julia Freybote (Contact Author)

Portland State University ( email )

PO Box 751
Portland, OR 97207
United States

Gianluca Marcato

Henley Business School - University of Reading ( email )

Department of Real Estate & Planning
Reading, RG6 6UD
United Kingdom
+44 (0)118 3788178 (Phone)
+44 (0)118 3788172 (Fax)

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