The Consequences of REIT Index Membership for Return Patterns

40 Pages Posted: 20 Sep 2016 Last revised: 4 Oct 2016

See all articles by Andrey D. Pavlov

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area

Eva Steiner

Cornell SC Johnson College of Business

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Multiple version iconThere are 2 versions of this paper

Date Written: September 18, 2016

Abstract

We study the impact of S&P index membership on REIT stock returns. Given the hybrid nature of REITs, their returns may become more like those of other indexed stocks and less like those of their underlying properties. The existing literature does not offer clear predictions on these potential outcomes. Taking advantage of the inclusion of REITs in major S&P indexes starting in 2001, we find that shared index membership significantly increases the correlation between REIT returns after controlling for the stock characteristics that determine index membership. We also document that index membership enhances the link between REIT stock returns and the performance of the underlying real estate, consistent with improved pricing efficiency. REIT investors appear to be able to enjoy the benefits of improved visibility and liquidity associated with index membership as well as the exposure to underlying real estate markets and the related benefits of diversification.

Keywords: Real Estate, Investment, Index Membership, REITs

JEL Classification: R3, G14, G11, G12

Suggested Citation

Pavlov, Andrey D. and Steiner, Eva Maria and Wachter, Susan M., The Consequences of REIT Index Membership for Return Patterns (September 18, 2016). Available at SSRN: https://ssrn.com/abstract=2840401 or http://dx.doi.org/10.2139/ssrn.2840401

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada
604 291 5835 (Phone)
604 291 4920 (Fax)

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/

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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