Article

The Journal of Real Estate Finance and Economics

, Volume 5, Issue 4, pp 401-418

First online:

The predictability of returns on equity REITs and their co-movement with other assets

  • Crocker H. LiuAffiliated withDepartment of Finance, New York University, Stern School of Business
  • , Jianping MeiAffiliated withDepartment of Finance, New York University, Stern School of Business

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Abstract

Recent evidence suggests that the variation in the expected excess returns is predictable and arises from changes in business conditions. Using a multifactor latent variable model with time-varying risk premiums, we decompose excess returns into expected and unexpected excess returns to examine what determines movements in expected excess returns for equity REITs are more predictable than all other assets examined, due in part to cap rates which contain useful information about the general risk condition in the economy. We also find that the conditional risk premiums (expected excess returns) on EREITs move very closely with those of small cap stocks and much less with those of bonds.

Key words

Equity REITs Predictability Latent-variable model Hybrid