Skip to main content
SpringerLink
Log in

Changes in sentiment on REIT industry excess returns and volatility

  • Published:
Financial Markets and Portfolio Management Aims and scope Submit manuscript

Abstract

REIT characteristics pose unique risks and benefits to investors who seek liquid diversification and hedging vehicles to complement their portfolios. This paper tests for the asymmetric effect of individual and institutional investor sentiment on REIT industry returns and conditional volatility. We simultaneously model the impact of two markedly different groups of investors on the return generating process of the REIT industry. Our findings suggest that noise trading imposes significant systemic risk on the realization of REIT industry returns. Interestingly, corrections in institutional investor expectations have a larger effect on REIT industry returns and volatility than changes in individual investor expectations. More specifically, bearish shifts in institutional investor expectations of future market conditions have a significantly larger impact on returns and volatility than bullish shifts. Results align with the overreaction to negative information and loss aversion hypotheses.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. REIT qualifying rules can be accessed at: https://doi.org/www.reit.com/investing/reit-basics/what-reit.

  2. Institutions that invest in REITs include bank trusts, insurance companies, mutual funds/investment advisers, and others (Devos et al. 2012). The group with the largest REIT holdings is mutual funds/investment advisers (38% of ownership on average).

  3. Accessed on November 29, 2014. https://doi.org/mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

  4. An advantage of utilizing the II and AAII as our proxies for sentiment is the weekly frequency which suits our methodology, whereas many other sentiment proxies are collected in either monthly or quarterly frequency.

  5. All analyses were also performed using levels of investor sentiment. Results using levels rather than changes in sentiment yield qualitatively similar results to the ones reported. For the sake of brevity, we omit these results but they are available upon request.

  6. Because some of the correlations appear to be relatively large, for example, the pair-wise correlation between Def and Prem (0.382), we additionally run various OLS regressions, similar to the specifications we will use in the empirical section (e.g., Eq. 1), to calculate the Variance Inflation Factors (VIF). We found no evidence that multicollinearity could be a concern as all VIF were below 10.

  7. At a 10% level we fail to reject homoscedasticity only in Model 2 (Table 5).

  8. The negative and statistically significant point estimate on \( \varepsilon_{t - 1}^{{}} /\sqrt {h_{t - 1} } \) is consistent with previous findings (Lee et al. 1992); negative shocks cause higher upward revisions in volatility than positive shocks.

  9. Alternative specification using excess NAREIT total returns provided qualitatively the same results.

References

  • Baker, M., Wurgler, J.: Investor sentiment and the cross-section of stock returns. J. Finance 61(4), 1645–1680 (2006)

    Article  Google Scholar 

  • Baker, M., Wurgler, J.: Investor sentiment in the stock market. J. Econ. Perspect. 21(2), 129–151 (2007)

    Article  Google Scholar 

  • Barkman, R.J., Ward, C.W.R.: Investor sentiment and noise traders: discount to net asset value in listed property companies in the U.K. J. Real Estate Res. 18(2), 291–312 (1999)

    Google Scholar 

  • Black, F.: Noise. J. Finance 41(3), 529–543 (1986)

    Article  Google Scholar 

  • Brown, G.W.: Volatility, sentiment, and Noise Traders. Financ. Anal. J. 55(2), 82–90 (1999)

    Article  Google Scholar 

  • Brown, G.W., Cliff, M.T.: Investor sentiment and the near-term stock market. J. Empir. Finance 11(1), 1–27 (2004)

    Article  Google Scholar 

  • Brown, G.W., Cliff, M.T.: Investor sentiment and asset valuation. J. Bus. 78(2), 405–440 (2005)

    Article  Google Scholar 

  • Buttimer, R.J., Hyland, D.C., Sanders, A.B.: REITs, IPO waves and long-run performance. Real Estate Econ. 33(1), 51–87 (2005)

    Article  Google Scholar 

  • Chan, K., Hendershott, P., Sanders, A.: Risk and return on real estate: evidence from equity REITs. Real Estate Econ. 18(4), 431–452 (1990)

    Article  Google Scholar 

  • Chan, S., Erickson, J., Wang, K.: Real estate investment trusts: Structure, performance, and investment opportunities. Oxford University Press, Oxford/New York (2003)

    Google Scholar 

  • Chan, S.H., Leung, W.-K., Wang, K.: Changes in REIT structure and stock performance: evidence from the monday stock anomaly. Real Estate Econ. 33(1), 89–120 (2005)

    Article  Google Scholar 

  • Chiang, K.C.H., Lee, M.-L.: The Role of Correlated Trading in Setting REIT Prices. J. Real Estate Finance Econ. 41(3), 320–338 (2010)

    Article  Google Scholar 

  • Clayton, J., MacKinnon, G.: Explaining the discount to NAV in REIT pricing: noise or information? RERI Working Paper, January 2001 (2001)

  • Das, P., Freybote, J., Marcato, G.: An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market. J. Real Estate Finance Econ. 51(2), 160–189 (2014)

    Article  Google Scholar 

  • De Bondt, W., Thaler, R.: Does the stock market overreact? J. Finance 40(3), 793–805 (1985)

    Article  Google Scholar 

  • De Long, J., Shleifer, A., Summers, L., Waldmann, R.: Noise trader risk in financial markets. J. Polit. Econ. 98(4), 703–738 (1990)

    Article  Google Scholar 

  • Devos, E., Ong, S.-E., Spieler, A.C.: REIT institutional ownership dynamics and the financial crisis. J. Real Estate Finance Econ. 47(2), 1–23 (2012)

    Google Scholar 

  • Downs, D.H.: The value in targeting institutional investors: evidence from the five-or-fewer rule change. Real Estate Econ. 26(4), 613–649 (1998)

    Article  Google Scholar 

  • Escobari, D., Lee, J.: Demand uncertainty and capacity utilization in airlines. Empir. Econ. 47(1), 1–19 (2014)

    Article  Google Scholar 

  • Fama, E.: The behavior of stock-market prices. J. Bus. 38(1), 34–105 (1965)

    Article  Google Scholar 

  • Fama, E., French, K.: The cross-section of expected stock returns. J. Finance 47(2), 427–465 (1992)

    Article  Google Scholar 

  • Fama, E., French, K.: Common risk factors in the returns on stocks and bonds. J. Finance Econ. 33(1), 3–56 (1993)

    Article  Google Scholar 

  • Freybote, J., Seagraves, P.A.: Heterogeneous investor sentiment and institutional real estate investments. Real Estate Econ. 45(1), 154–176 (2017)

    Article  Google Scholar 

  • Glosten, L.R., Jagannathan, R., Runkle, D.A.: On the relation between the expected value and the volatility of the nominal excess return on stocks. J. Finance 48(5), 1779–1801 (1993)

    Article  Google Scholar 

  • Han, J., Liang, Y.: The historical performance of real estate investment trusts. J. Real Estate Res. 10(3), 235–262 (1995)

    Google Scholar 

  • Johnk, D.W., Soydemir, G.: Time-varying market price of risk and investor sentiment: evidence from a multivariate GARCH Model. J. Behav. Finance 16, 105–119 (2015)

    Article  Google Scholar 

  • Lee, W.Y., Jiang, C.X., Indro, D.C.: Stock market volatility, excess returns, and the role of investor sentiment. J. Bank. Finance 26(12), 2277–2299 (2002)

    Article  Google Scholar 

  • Lee, S., Stevenson, S.: The case for REITs in the mixed-asset portfolio in the short and long run. J. Real Estate Portf. Manag. 11(1), 55–80 (2005)

    Google Scholar 

  • Lee, M.-L., Lee, M.-T., Chiang, K.C.H.: Real estate risk exposure of equity real estate investment trusts. J. Real Estate Finance Econ. 36, 165–181 (2008)

    Article  Google Scholar 

  • Lin, C.Y., Rahman, H., Yung, K.: Investor sentiment and REIT returns. J. Real Estate Finance Econ. 39, 450–471 (2009)

    Article  Google Scholar 

  • Liu, S.: Investor sentiment and stock market liquidity. J. Behav. Finance 16, 51–67 (2015)

    Article  Google Scholar 

  • Neal, R., Wheatley, S. M.: Do measures of investor sentiment predict returns? J. Finan. Quant. Anal. 33(4), 523–547 (1998)

    Article  Google Scholar 

  • Nelson, D.B.: Conditional heteroscedasticity in asset returns: a new approach. Econometrica 59(2), 347–370 (1991)

    Article  Google Scholar 

  • Oikarinen, E., Hoesli, M., Serrano, C.: The long-run dynamics between direct and securitized real estate. J. Real Estate Res. 33(1), 73–103 (2011)

    Google Scholar 

  • Pagliari, J.L., Scherer, K.A., Monopoli, R.T.: Public versus private real estate equities: a more refined, long term comparison. Real Estate Econ. 33(1), 147–187 (2005)

    Article  Google Scholar 

  • Peterson, J.D., Hsieh, C.H.: Do common risk factors in the returns on stocks and bonds explain returns on REITs? Real Estate Econ. 25(2), 321–345 (1997)

    Article  Google Scholar 

  • Ro, S.H., Ziobrowski, A.J.: Does Focus Really Matter? Specialized vs. Diversified REITs. J. Real Estate Finance Econ. 42(1), 68–83 (2011)

    Article  Google Scholar 

  • Verma, R., Soydemir, G.: The impact of individual and institutional investor sentiment on the market price of risk. Q. Rev. Econ. Finance 49(3), 1129–1145 (2009)

    Article  Google Scholar 

Download references

Acknowledgements

The authors thank the editor and two anonymous referees for their insightful comments and guidance.

Author information

Authors and Affiliations

  1. Department of Finance, School of Business, College of Charleston, 5 Liberty Street, Beatty Center, Charleston, SC, 29424, USA

    Daniel Huerta-Sanchez

  2. Department Economics and Finance, The University of Texas Rio Grande Valley, 1201 West University Drive, Edinburg, TX, 78539, USA

    Diego Escobari

Authors
  1. Daniel Huerta-Sanchez
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Diego Escobari
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Daniel Huerta-Sanchez.

Appendix

Appendix

Table 10 presents various specifications following a version of Eq. (1) to analyze how the pricing of the Fama–French factors is affected by sentiment. We create six interaction variables using all the combinations between each of the three Fama–French factors and our two measures of sentiment. All models reported in the table use excess NAREIT price returns to construct the dependent variable.Footnote 9

Table 10 Sentiment and the pricing of the Fama–French factors
Full size table

Models 1 and 2 show that sentiment increases the role of Rm − Rf on excess returns (higher measure of sentiment increases the positive effect of Rm − Rf on excess returns). The magnitude of the effect is relatively important. Based on the point estimates in Model 1, a one standard deviation increase in institutional investor sentiment increases the marginal effect of Rm − Rf on excess returns by about 0.148.

The estimates presented in Models 3 and 4 show that the interaction terms are not statistically significant. Our interpretation is that our measures of sentiment have no role on how SMB affects excess returns.

The positive and statistically significant slope coefficients on the interaction terms on Models 5 and 6 show that sentiment positively affects the pricing of HML. For example, based on the point estimates of Model 5, a one standard deviation increase in the institutional investor sentiment increases the marginal effect of HML on excess returns by 0.388. We view this change as relatively large.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Huerta-Sanchez, D., Escobari, D. Changes in sentiment on REIT industry excess returns and volatility. Financ Mark Portf Manag 32, 239–274 (2018). https://doi.org/10.1007/s11408-018-0312-9

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11408-018-0312-9

Keywords

JEL Classification

Search

Navigation