Volatility and the Cross-Section of Real Estate Equity Returns during COVID-19
31 Pages Posted: 13 May 2020 Last revised: 18 Aug 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 internationally. I construct a global COVID-19 risk factor to capture the risk exposure of individual stocks to the pandemic. The paper also assesses the low-risk effect puzzle in real estate stocks. I find 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 sectors. Fama-MacBeth regressions reveal evidence for a low-risk effect – both through market and COVID-19 risks – which is not be associated with behavioral biases but rather with financial constraints. Consistent with recent research, the findings in this paper suggest that investors perceive the shock caused by the COVID-19 to be amplified by financial channels.
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: Suggested Citation