Common risk factors and risk–return trade-off for REITs and treasuries

Faten Ben Bouheni () and Manish Tewari ()
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Faten Ben Bouheni: Menlo College
Manish Tewari: Menlo College

Journal of Asset Management, 2023, vol. 24, issue 5, No 4, 374-395

Abstract: Abstract We provide strong evidence of flight-to-safety phenomenon from real estate market, with REITs as the proxy, to bond market during elevated real estate market volatility. We use three robust factors; the equity market risk premium, the momentum, and the real estate market volatility to capture the cross-sectional expected excess returns. We consider a comprehensive list of returns on REITs and maturity-sorted treasuries from January 2000 to December 2021 to predict excess returns in the three-factor linear model. We find that the expected returns on real estate market and treasury market exhibit inverse relationship in market risk premium and real estate market volatility loading factors. The momentum factor is strongly significant for the short-maturity treasuries and for the mortgage REITs in general, and for the home financing mortgage REITs in particular. The results are robust when we include macroeconomic variables and the time factor in the analysis. This observation clearly depicts interest sensitivity of these instruments. Our study has critical relevance, from the diversification perspective, in the current US macro-environment of rising inflation and interest rates.

Keywords: Risk–return trade-off; REITs; Treasuries; Risk factors; Prediction (search for similar items in EconPapers)
JEL-codes: C53 G11 G12 R30 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1057/s41260-023-00309-0

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