Overreaction‐based momentum in the real estate investment trust market

Tsung‐Yu Chen, Guan‐Ying Huang and Zhen‐Xing Wu

International Review of Finance, 2022, vol. 22, issue 3, 453-471

Abstract: This paper examines cross‐sectional return predictability in a real estate investment trust (REIT) market by using a continuing overreaction measure constructed based on the weighted average of signed volumes. We show that (a) trading strategies that involve buying REITs with an upward continuing overreaction and selling REITs with a downward continuing overreaction generate intermediate‐term momentum and long‐term return reversals; (b) the continuing overreaction measure provides superior predictive power in future REIT returns compared with the traditional predictor measured by past returns; and (c) overreaction‐based momentum is more pronounced when the market state continues in the same direction. Evidence from the REIT market provides direct support for the return prediction of the model based on investor overconfidence and biased self‐attribution rather than the model based on dividend growth theory.

Date: 2022
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