Volatility and the Cross-Section of Real Estate Equity Returns during COVID-19

29 Pages Posted: 13 May 2020 Last revised: 2 Jun 2020

Date Written: May 12, 2020


This paper uses the global systemic shock associated with the outbreak of the novel coronavirus Covid-19 to assess the risk-return relationship in the cross-section of real estate equities internatioanlly. Real estate is among the industries hardest hit as countries around the world lock down their economies. I construct a global Covid-19 risk factor to capture the risk exposure of individual stocks to the pandemic. I report that the average firm sensitivity to the Covid-19 risk factor increases from close to zero prior to the pandemic to 0.6 during the pandemic with large variations across countries and property sectors. Fama MacBeth regressions reveal evidence for a low-risk effect which is not explained by behavioral biases but rather by financial constraints. Consistent with the existing research on the effects of Covid-19 on stock markets, the findings in this paper suggest that investors perceive the shock caused by the pandemic to be amplified by financial channels. Finally, countries with previous experience to similar pandemics are associated with significantly higher returns and alphas.

Keywords: Low-risk effect, coronavirus, COVID-19 risk factor, pandemic, financial constraints, behavioral effects, factor model, cross-section of returns, commercial real estate, REITs, systemic risk, idiosyncratic volatility

JEL Classification: G1, G14, I1, D84, R30

Suggested Citation

Milcheva, Stanimira, Volatility and the Cross-Section of Real Estate Equity Returns during COVID-19 (May 12, 2020). Available at SSRN: https://ssrn.com/abstract=3599211 or http://dx.doi.org/10.2139/ssrn.3599211

Stanimira Milcheva (Contact Author)

University College London ( email )

1-19 Torrington Place
Department of Construction and Project Management
London, London WC1E 7HB
United Kingdom

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