Three essays on real estate investment trust return and risk

Date of Completion

January 1997


Economics, Finance




REITs restructure and rechannel the flows of capital within the real estate sectors. Rapid growing capitalization of REITs has gained the attention of individual and institutional investors and has shown REITs' potential as investment vehicles. How to evaluate those firms and what are their interactions with the other markets have become critical recently. We investigate REITs' risk, return behaviors, and market interactions for the past three decades in three essays.^ The first essay analyzes publicly traded REITs for the period 1977 through 1994 for their return performance relative to traditional measures of risk, market size, book-to-market equity value, and value-relevant accounting attributes. We find that the predictability of beta on average returns is not observed, but firm size performs as a good predictor for average return consistently. The book-to-market equity value and the other accounting factors provide information relative to REIT performance after 1992.^ The second essay addresses the issue of whether REITs behave like stocks, bonds, or real estate. Prior studies on this topic apply simple correlation analysis and do not examine the structural changes of REITs in the 1990s. In this research, cointegration methodology is employed to explore this relationship and the vector autoregressive model is used to test for causality. The findings are consistent with our hypothesis that recent market developments have impacted REIT characteristics and that REITs behave more like stocks and less like bonds after 1992. In addition, the integration between REITs and inflation is not observed during the post-1992 period.^ Contrary to Fisher's purchasing power parity, previous research has documented a negative relation between REIT returns and inflation. The third essay reexamines this issue by implementing a multivariate vector-autoregression approach on the causal relationship among REIT return, real activity, monetary policy, and inflation. Our findings are consistent with Geske and Roll's (1983) reversed causality model that REIT returns signal changes in inflation and monetary policy. The assertion that REITs are perverse inflation hedges is spurious. ^