Advertisement

REIT Stock Prices with Inflation Hedging and Illusion

  • William G. HardinIIIEmail author
  • Xiaoquan Jiang
  • Zhonghua Wu
Article

Abstract

Employing dividend yield decomposition, this paper explores the inflation illusion and inflation hedging effects on REIT stock prices. Results show that changes in expected inflation explain a large share of the time series variation of the mispricing component of the dividend yield. Also, while both inflation hedging and inflation illusion effects exist for REITs, the inflation illusion effect tends to dominate the hedging effect during the 1980 to 2008 period. These results suggest that investors are unable to quickly reconcile changes in discount rates and dividend growth rates associated with inflation into stock prices. The findings also provide an alternative explanation as to why short-term REIT returns are often negatively related to expected inflation.

Keywords

Stock prices Inflation illusion Dividend yield decomposition REITs 

JEL Classifications

G11 G12 E31 

References

  1. Ambrose, B. W., Lee, D. W., & Peek, J. (2007). Comovement after joining an index: spillovers of nonfundamental effects. Real Estate Economics, 35(1), 57–90.CrossRefGoogle Scholar
  2. Amihud, Y. (1996). Unexpected inflation and stock returns revisited—evidence from Israel. Journal of Money, Credit and Banking, 28(1), 22–33.CrossRefGoogle Scholar
  3. Asness, C. S. (2003). Fight the Fed model: the relationship between future returns and stock and bond market yields. Journal of Portfolio Management, 30(1), 11–24.CrossRefGoogle Scholar
  4. Below, S. D., Stansell, S. R., & Coffin, M. (2000). The determinants of REIT institutional ownership: tests of the CAPM. Journal of Real Estate Finance and Economics, 21(3), 263–278.CrossRefGoogle Scholar
  5. Bodie, Z. (1976). Common stocks as a hedge against inflation. Journal of Finance, 31(2), 459–470.Google Scholar
  6. Brunnermeier, M. K., & Julliard, C. (2008). Money illusion and housing frenzies. Review of Financial Studies, 21(1), 135–180.CrossRefGoogle Scholar
  7. Campbell, J. Y. (1991). A variance decomposition for stock returns. Economic Journal, 101, 157–179.CrossRefGoogle Scholar
  8. Campbell, J. Y., & Shiller, R. J. (1988). The dividend-price ratio and expectations of future dividends and discount factors. Review of Financial Studies, 1(3), 195–228.CrossRefGoogle Scholar
  9. Campbell, J. Y., & Vuolteenaho, T. (2004). Inflation illusion and stock prices. American Economic Review, 94(2), 19–23.CrossRefGoogle Scholar
  10. Chatrath, A., & Liang, Y. (1998). REITs and inflation: a long-run perspective. Journal of Real Estate Research, 16(3), 311–325.Google Scholar
  11. Chen, L., & Zhao, I. X. (2009). Return decomposition. Review of Financial Studies, 22(12), 5213–5249.CrossRefGoogle Scholar
  12. Chiang, K. C. H., Lee, M., & Wisen, C. (2005). On the time-series properties of real estate investment trust betas. Real Estate Economics, 33(2), 381–396.CrossRefGoogle Scholar
  13. Cohen, R., Polk, C., & Vuolteenaho, T. (2005). Money illusion in the stock market: the Modigliani-Cohn hypothesis. Quarterly Journal of Economics, 120(2), 639–668.Google Scholar
  14. Fama, E. F., & Schwert, G. W. (1977). Asset returns and inflation. Journal of Financial Economics, 5(2), 115–146.CrossRefGoogle Scholar
  15. Fama, E. F., & French, K. R. (2001). Disappearing dividends: changing firm characteristics or increased reluctance to pay? Journal of Financial Economics, 60(1), 3–43.CrossRefGoogle Scholar
  16. Fehr, E., & Tyran, J. R. (2001). Does money illusion matter? American Economic Review, 91(5), 1239–1262.CrossRefGoogle Scholar
  17. Geske, R., & Roll, R. (1983). The fiscal and monetary linkage between stock returns and inflation. Journal of Finance, 38(1), 1–33.Google Scholar
  18. Glascock, J. L., Lu, C., & So, R. (2002). REIT returns and inflation: perverse or reverse causality effects? Journal of Real Estate Finance and Economics, 24(3), 301–317.CrossRefGoogle Scholar
  19. Gordon, M. (1962). The investment, financing, and valuation of the corporation. Homewood: Irwin.Google Scholar
  20. Gultekin, N. B. (1983). Stock market returns and inflation: evidence from other countries. Journal of Finance, 38(1), 49–65.Google Scholar
  21. Gyourko, J., & Linneman, P. (1988). Owner-occupied homes, income-producing real estate and REITs as inflation hedges. Journal of Real Estate Finance and Economics, 1(4), 347–372.CrossRefGoogle Scholar
  22. Hartzell, D., Hekman, J. S., & Miles, M. E. (1987). Real state returns and inflation. AREUEA Journal, 15(1), 617–637.Google Scholar
  23. Hoesli, M., Lizieri, C., & MacGregor, B. (2008). The inflation hedging characteristics of US and UK investments: a multi-factor error correction approach. Journal of Real Estate Finance and Economics, 36(2), 183–206.CrossRefGoogle Scholar
  24. Kallberg, J. G., Liu, C. H., & Srinvasan, A. (2003). Dividend pricing models and REITs. Real Estate Economics, 31(3), 425–450.CrossRefGoogle Scholar
  25. Khoo, T., Hartzell, D., & Hoesli, M. (1993). An investigation of the change in real estate investment trust betas. Journal of the American Real Estate and Urban Economics Association, 21(2), 107–130.CrossRefGoogle Scholar
  26. Ling, D. C., & Naranjo, A. (1999). The integration of commercial real estate markets and stock markets. Real Estate Economics, 27(3), 483–515.CrossRefGoogle Scholar
  27. Modigliani, F., & Cohn, R. (1979). Inflation, rational valuation, and the market. Financial Analysts Journal, 37, 24–44.CrossRefGoogle Scholar
  28. Park, J. Y., Mullineaux, D. J., & Chew, I. K. (1990). Are REITs inflation hedges? Journal of Real Estate Finance and Economics, 3(1), 91–103.CrossRefGoogle Scholar
  29. Piazzesi, M., & Schneider, M. (2008). Inflation illusion, credit, and asset pricing. In J. Y. Campbell (Ed.), Asset prices and monetary policy (pp. 147–189). Chicago: The University of Chicago Press.Google Scholar
  30. Polk, C., Thompson, S., & Vuolteenaho, T. (2006). Cross-sectional forecasts of the equity premium. Journal of Financial Economics, 81(1), 101–141.CrossRefGoogle Scholar
  31. Ritter, J. R., & Warr, R. (2002). The decline of inflation and the bull market of 1982–1999. Journal of Financial and Quantitative Analysis, 37(1), 29–61.CrossRefGoogle Scholar
  32. Sirmans, G. S., & Sirmans, C. F. (1987). The historical perspective of real estate returns. Journal of Portfolio Management, 13(3), 22–31.CrossRefGoogle Scholar
  33. Thomas, J., & Zhang, F. (2007). Inflation illusion and stock prices: Comment. Yale School of Management working paper.Google Scholar
  34. Titman, S., & Warga, A. (1989). Stock returns as predictors of interest rates and inflation. Journal of Financial and Quantitative Analysis, 24(1), 47–58.CrossRefGoogle Scholar
  35. Vuolteenaho, T. (2002). What drives firm-level stock returns? Journal of Finance, 57(1), 233–264.CrossRefGoogle Scholar
  36. Williams, J. B. (1938). The theory of investment value. Cambridge: Harvard University Press.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  • William G. HardinIII
    • 1
    Email author
  • Xiaoquan Jiang
    • 2
  • Zhonghua Wu
    • 3
  1. 1.College of Business AdministrationFlorida International UniversityMiamiUSA
  2. 2.College of Business AdministrationFlorida International UniversityMiamiUSA
  3. 3.College of Business AdministrationFlorida International UniversityMiamiUSA

Personalised recommendations