Tracking the Evolution of Idiosyncratic Risk and Cross-Sectional Expected Returns for US REITs

Nusret Cakici (), Isil Erol and Dogan Tirtiroglu ()

The Journal of Real Estate Finance and Economics, 2014, vol. 48, issue 3, 415-440

Abstract: This paper adopts the methodology in Bali and Cakici (Journal of Financial & Quantitative Analysis, 43, 29–58, 2008 ) in tracking the evolution of the relation between equity REITs’ idiosyncratic risk and their cross-sectional expected returns between 1981 and 2010. In addition to the full sample period, we study this relation for (i) January 1981–December 1992, (ii) January 1993–September 2001, (iii) November 2001–August 2008 and (iv) November 2001–December 2010 and produce empirical results for (i) all sample REITs, (ii) REITs with a price greater than $10 or (iii) REITs with a price greater than $5. Each period represents different dynamics (including the Global Financial Crisis) in the life of the REIT industry and leads to a different hypothesis. Further, we present comparative results based on the Fama-French 3- and 4-factor models. Overall, we document a negative relation between idiosyncratic risk and cross-sectional expected returns and demonstrate that this negative relation changes over time. These findings amplify the “idiosyncratic volatility puzzle,” as reported in the recent finance literature. Interestingly, REITs with a price of $5-to-$10 do well in 2009 and 2010. Further, the momentum factor appears to be influential since the first-ever listing of a REIT in the S&P500 Index in early October 2001. Copyright Springer Science+Business Media New York 2014

Keywords: Idiosyncratic risk; Expected returns; REITs; GFC; REIT Maturity Era; G10; G11; G12 (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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DOI: 10.1007/s11146-013-9410-7

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