Does Inflation Illusion Explain the Relation between REITs and Inflation?
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We examine whether the observed negative relations between real estate investment trust (REIT) returns and inflation can be explained by the inflation illusion. We identify the mispricing component in REIT prices based on present value models, both linear and loglinear, and then we investigate whether inflation can explain the mispricing component. When we allow for time-varying interest rates, inflation no longer explains the REIT mispricing component. Instead, we find that behavioral factors such as consumer sentiments contribute to the mispricing of REIT prices.
KeywordsREIT returns Inflation hedge Mispricing
JEL ClassificationsG12 R31 E44 C32
We would like to thank an anonymous reviewer for the valuable comments and suggestions. This project was supported by WCU (World Class University) Program funded through Sogang University, Seoul, Korea.
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