Advertisement

Financial Markets and Portfolio Management

, Volume 32, Issue 3, pp 239–274 | Cite as

Changes in sentiment on REIT industry excess returns and volatility

  • Daniel Huerta-SanchezEmail author
  • Diego Escobari
Article
  • 158 Downloads

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.

Keywords

REITs Investor sentiment Noise traders Volatility GARCH-M 

JEL Classification

G4 G11 

Notes

Acknowledgements

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

References

  1. Baker, M., Wurgler, J.: Investor sentiment and the cross-section of stock returns. J. Finance 61(4), 1645–1680 (2006)Google Scholar
  2. Baker, M., Wurgler, J.: Investor sentiment in the stock market. J. Econ. Perspect. 21(2), 129–151 (2007)Google Scholar
  3. 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
  4. Black, F.: Noise. J. Finance 41(3), 529–543 (1986)Google Scholar
  5. Brown, G.W.: Volatility, sentiment, and Noise Traders. Financ. Anal. J. 55(2), 82–90 (1999)Google Scholar
  6. Brown, G.W., Cliff, M.T.: Investor sentiment and the near-term stock market. J. Empir. Finance 11(1), 1–27 (2004)Google Scholar
  7. Brown, G.W., Cliff, M.T.: Investor sentiment and asset valuation. J. Bus. 78(2), 405–440 (2005)Google Scholar
  8. Buttimer, R.J., Hyland, D.C., Sanders, A.B.: REITs, IPO waves and long-run performance. Real Estate Econ. 33(1), 51–87 (2005)Google Scholar
  9. Chan, K., Hendershott, P., Sanders, A.: Risk and return on real estate: evidence from equity REITs. Real Estate Econ. 18(4), 431–452 (1990)Google Scholar
  10. Chan, S., Erickson, J., Wang, K.: Real estate investment trusts: Structure, performance, and investment opportunities. Oxford University Press, Oxford/New York (2003)Google Scholar
  11. 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)Google Scholar
  12. 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)Google Scholar
  13. Clayton, J., MacKinnon, G.: Explaining the discount to NAV in REIT pricing: noise or information? RERI Working Paper, January 2001 (2001)Google Scholar
  14. 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)Google Scholar
  15. De Bondt, W., Thaler, R.: Does the stock market overreact? J. Finance 40(3), 793–805 (1985)Google Scholar
  16. De Long, J., Shleifer, A., Summers, L., Waldmann, R.: Noise trader risk in financial markets. J. Polit. Econ. 98(4), 703–738 (1990)Google Scholar
  17. 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
  18. 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)Google Scholar
  19. Escobari, D., Lee, J.: Demand uncertainty and capacity utilization in airlines. Empir. Econ. 47(1), 1–19 (2014)Google Scholar
  20. Fama, E.: The behavior of stock-market prices. J. Bus. 38(1), 34–105 (1965)Google Scholar
  21. Fama, E., French, K.: The cross-section of expected stock returns. J. Finance 47(2), 427–465 (1992)Google Scholar
  22. Fama, E., French, K.: Common risk factors in the returns on stocks and bonds. J. Finance Econ. 33(1), 3–56 (1993)Google Scholar
  23. Freybote, J., Seagraves, P.A.: Heterogeneous investor sentiment and institutional real estate investments. Real Estate Econ. 45(1), 154–176 (2017)Google Scholar
  24. 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)Google Scholar
  25. Han, J., Liang, Y.: The historical performance of real estate investment trusts. J. Real Estate Res. 10(3), 235–262 (1995)Google Scholar
  26. 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)Google Scholar
  27. 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)Google Scholar
  28. 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
  29. 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)Google Scholar
  30. Lin, C.Y., Rahman, H., Yung, K.: Investor sentiment and REIT returns. J. Real Estate Finance Econ. 39, 450–471 (2009)Google Scholar
  31. Liu, S.: Investor sentiment and stock market liquidity. J. Behav. Finance 16, 51–67 (2015)Google Scholar
  32. Neal, R., Wheatley, S. M.: Do measures of investor sentiment predict returns? J. Finan. Quant. Anal. 33(4), 523–547 (1998)Google Scholar
  33. Nelson, D.B.: Conditional heteroscedasticity in asset returns: a new approach. Econometrica 59(2), 347–370 (1991)Google Scholar
  34. 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
  35. 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)Google Scholar
  36. 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)Google Scholar
  37. Ro, S.H., Ziobrowski, A.J.: Does Focus Really Matter? Specialized vs. Diversified REITs. J. Real Estate Finance Econ. 42(1), 68–83 (2011)Google Scholar
  38. 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)Google Scholar

Copyright information

© Swiss Society for Financial Market Research 2018

Authors and Affiliations

  1. 1.Department of Finance, School of BusinessCollege of CharlestonCharlestonUSA
  2. 2.Department Economics and FinanceThe University of Texas Rio Grande ValleyEdinburgUSA

Personalised recommendations