Asymmetric Dependence in Real Estate Investment Trusts: An Asset-Pricing Analysis

Posted: 25 Feb 2018

See all articles by Jamie Alcock

Jamie Alcock

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

Petra Sinagl

University of Iowa - Department of Finance

Date Written: February 13, 2018

Abstract

REITs are often assumed to be defensive assets having a low correlation with market returns. However, this dependence is not symmetric across the joint-return distribution. Disappointment-averse investors with state-dependent preferences attach (dis-)utility to investments exhibiting (lower-tail) upper-tail asymmetric dependence. We find strong empirical evidence that investors price this asymmetric dependence in the cross section of US REIT returns. In particular, we show that REIT stocks with lower-tail asymmetric dependence attract a risk premium averaging 1.3% p.a. and REIT stocks exhibiting upper-tail asymmetric dependence are traded at discount averaging 5.8% p.a. We find no evidence that the equity B is positively priced in US REIT returns. Our findings imply that traditional estimators of REIT cost of capital and performance measurement, are likely to be substantially misrepresentative.

Keywords: REITs; Asymmetric dependence; Asset pricing; Tail risk; downside risk; B; Jadj

Suggested Citation

Alcock, Jamie and Sinagl, Petra, Asymmetric Dependence in Real Estate Investment Trusts: An Asset-Pricing Analysis (February 13, 2018). Journal of Real Estate Finance and Economics, Vol. 56, No. 2, 2018, Available at SSRN: https://ssrn.com/abstract=3123217

Jamie Alcock (Contact Author)

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

Petra Sinagl

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

HOME PAGE: http://andrlikova.com

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