Time Varying Risk in U.S. Housing Sector and Real Estate Investment Trusts Equity Return

53 Pages Posted: 28 Jul 2021

Date Written: July 25, 2021

Abstract

This study examines how housing sector volatilities affect real estate investment trust (REIT) equity return in the United States. I argue that unexpected changes in housing variables can be a source of aggregate housing risk, and the first principal component extracted from the volatilities of U.S. housing variables can predict the expected REIT equity returns. I propose and construct a factor-based housing risk index as an additional factor in asset price models that uses the time-varying conditional volatility of housing variables within the U.S. housing sector. The findings show that the proposed housing risk index is economically and theoretically consistent with the risk-return relationship of the conditional Intertemporal Capital Asset Pricing Model (ICAPM) of Merton (1973), which predicts an average maximum of 5.6 percent of risk premium in REIT equity return. In subsample analyses, the positive relationship is not affected by sample periods' choice but shows higher housing risk beta values for the 2009-18 sample period. The relationship remains significant after controlling for VIX, Fama-French three factors, and a broad set of macroeconomic and financial variables. Moreover, the proposed housing beta also accurately forecasts U.S. macroeconomic and financial conditions.

Keywords: Housing risk index, REIT equity return, housing volatility,TGARCH, Intertemporal Capital Asset Pricing Model, risk-return relation.

JEL Classification: C51, C53, G11, G17

Suggested Citation

Alam, Masud, Time Varying Risk in U.S. Housing Sector and Real Estate Investment Trusts Equity Return (July 25, 2021). Available at SSRN: https://ssrn.com/abstract=3893131 or http://dx.doi.org/10.2139/ssrn.3893131

Masud Alam (Contact Author)

Masud Alam ( email )

Kumargaong Street
Sylhet Sadar
Sylhet, Sylhet 3114
Bangladesh

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