The Conditional CAPM and Time Varying Risk Premium for Equity REITs

23 Pages Posted: 12 Apr 2007

See all articles by Mohammad Najand

Mohammad Najand

Old Dominion University - Finance

Crystal Yan Lin

Eastern Illinois University - School of Business

Elizabeth Fitzgerald

Kennesaw State University - Michael J. Coles College of Business

Abstract

Given the recent much interest in REITs, we investigate if REITs have provided investors with superior risk/return trade off. Utilizing a conditional CAPM, we find that equity REITs have outperformed the market with an average abnormal annual return of 2.25% with a low time-varying beta of around .24 during June 1995 to December 2003 period. We utilize time-varying risk premium models for equity REITs with GARCH specifications and find that both the ARCH and GARCH effects are significant in our estimated models. In addition, the volatility shocks are quite persistent. Our results show that the market returns and the first order autocorrelation help explain the excess returns of equity REITs. However, the movement of interest rates contributes to equity REIT returns only when the market return is not present in our models.

Keywords: REIT, risk premium, conditional CAPM

Suggested Citation

Najand, Mohammad and Lin, Crystal Yan and Fitzgerald, Elizabeth, The Conditional CAPM and Time Varying Risk Premium for Equity REITs. Journal of Real Estate Portfolio Management, Vol. 12, No. 2, pp. 167-175, May-August 2006, Available at SSRN: https://ssrn.com/abstract=979352

Mohammad Najand

Old Dominion University - Finance ( email )

School of Business and Public Administration
Norfolk, VA 23529-0222
United States
757-683-3509 (Phone)
757-683-5639 (Fax)

Crystal Yan Lin (Contact Author)

Eastern Illinois University - School of Business ( email )

Charleston, IL 61920-3099
United States

Elizabeth Fitzgerald

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

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