Fundamental Drivers of Dependence in REIT Returns

46 Pages Posted: 4 Oct 2015

See all articles by Jamie Alcock

Jamie Alcock

The University of Sydney Business School; Centre for International Finance and Regulation (CIFR)

Eva Steiner

Cornell SC Johnson College of Business

Date Written: October 4, 2015

Abstract

We analyse the empirical relationships between firm fundamentals and the dependence structure between individual REIT and stock market returns. In contrast to previous studies, we distinguish between the average systematic risk of REITs and their asymmetric risk in the sense of a disproportionate likelihood of joint negative return clusters between REITs and the stock market. We find that REITs with low systematic risk are typically small, with low short-term momentum, low turnover, high growth opportunities and strong long-term momentum. Holding systematic risk constant, the main driving forces of asymmetric risk are leverage and, to some extent, short-term momentum. Specifically, we find that leverage has an asymmetric effect on REIT return dependence that outweighs the extent to which it increases the average sensitivity of REIT equity to market fluctuations, explaining the strong negative impact of leverage on firm performance especially during crisis periods that has been documented in recent empirical work.

Keywords: Portfolio Diversification, REITs, Real estate as an asset class

JEL Classification: G11, G12

Suggested Citation

Alcock, Jamie and Steiner, Eva Maria, Fundamental Drivers of Dependence in REIT Returns (October 4, 2015). Available at SSRN: https://ssrn.com/abstract=2669101 or http://dx.doi.org/10.2139/ssrn.2669101

Jamie Alcock

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Eva Maria Steiner (Contact Author)

Cornell SC Johnson College of Business ( email )

465B Statler Hall
Ithaca, NY 14853
United States

HOME PAGE: http://https://sha.cornell.edu/faculty-research/faculty/ems457/

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