An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market

Abstract

Institutional investors such as pension funds or insurance companies commonly invest in the unsecuritized and securitized real estate market. We investigate how institutional investor sentiment in the commercial real estate market affects institutional trading behavior in the REIT market and subsequently asset pricing. In particular, we test two alternative theories - flight to liquidity and style investing theory - to explain the sentiment-induced trading behavior of institutional investors in the REIT market for the pre-crisis (2002–2006), crisis (2007–2009) and post-crisis (2010–2012) period. We find that the applicability of either theory depends on economic conditions. In the pre-crisis period institutional investors switched capital in and out of REITs based on their sentiment in the private market (style investing). However, in the crisis period institutional investors switched capital from the illiquid private market to the more liquid REIT market (flight to liquidity). The flight to more liquid REITs continued into the post-crisis to a lesser extent and suggests that the financial crisis has changed institutional investment behavior. Our findings hold across different groups of REITs (e.g. high and low institutional ownership, S&P and non-S&P REITs) and property types. We also find that institutional real estate investor sentiment introduces a non-fundamental component into REIT pricing.

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

Fig. 1

References

  1. Acharya, V. V., & Pedersen, L. H. (2005). Asset pricing with liquidity risk. Journal of Financial Economics, 77, 375–410.

    Article  Google Scholar 

  2. 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.

    Article  Google Scholar 

  3. Amihud, Y. (2002). Illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets, 5, 31–56.

    Article  Google Scholar 

  4. Amihud, Y., & Mendelson, H. (1986). Asset pricing and the Bid-Ask spread. Journal of Financial Economics, 17, 223–249.

    Article  Google Scholar 

  5. Amihud, Y., Mendelson, H., & Wood, R. A. (1990). Liquidity and the 1987 stock market crash. Journal of Portfolio Management, 16(3), 65–69.

    Article  Google Scholar 

  6. Anand, A., Chakravarty, S., & Martell, T. (2005). Empirical evidence on the evolution of liquidity: choice of market versus limit orders by informed and uninformed traders. Journal of Financial Markets, 8, 289–309.

    Article  Google Scholar 

  7. Badrinath, S. G., & Wahal, S. (2002). Momentum trading by institutions. Journal of Finance, 57(6), 2449–2478.

    Article  Google Scholar 

  8. Baker, M., & Stein, J. C. (2004). Market liquidity as a sentiment indicator. Journal of Financial Markets, 7, 271–299.

    Article  Google Scholar 

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

    Article  Google Scholar 

  10. Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of Economic Perspectives, 21(2), 129–151.

    Article  Google Scholar 

  11. Baker, M., & Wurgler, J. (2012). Comovement and predictability relationships between bonds and the cross-section of stocks. Review of Asset Pricing Studies, 2(1), 57–87.

    Article  Google Scholar 

  12. Barberis, N., & Shleifer, A. (2003). Style investing. Journal of Financial Economics, 68, 161–199.

    Article  Google Scholar 

  13. Barberis, N., Shleifer, A., & Wurgler, J. (2005). Comovement. Journal of Financial Economics, 75, 283–317.

    Article  Google Scholar 

  14. Barkham, R. J., & Ward, C. W. R. (1999). Investor sentiment and noise traders: discount to Net asset value in listed property companies in the U.K. Journal of Real Estate Research, 18(2), 291–312.

    Google Scholar 

  15. Beber, A., Brandt, M. W., & Kavajecz, K. A. (2009). Flight-to-quality or flight-to-liquidity? evidence from the euro-area bond market. Review of Financial Studies, 22(3), 925–957.

    Article  Google Scholar 

  16. 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.

    Article  Google Scholar 

  17. Bianchi, D., & Guidolin, M. (2014). Can linear predictability models time bull and bear real estate markets? Out-of-sample evidence from REIT portfolios. Journal of Real Estate Finance and Economics, 49(1), 116–164.

    Article  Google Scholar 

  18. Brooks, C., & Tsolacos, S. (1999). The impact of economic and financial factors on UK property performance. Journal of Property Research, 16(2), 139–152.

    Article  Google Scholar 

  19. Brown, G. W., & Cliff, M. T. (2004). Investor sentiment and asset valuation. Journal of Business, 78(2), 405–440.

    Article  Google Scholar 

  20. Brunnermeier, M. K., & Pedersen, L. H. (2009). Market liquidity and funding liquidity. The Review of Financial Studies, 22(6), 2201–2238.

    Article  Google Scholar 

  21. Carhart, M. M. (1997). On persistence in mutual fund performance. Journal of Finance, 52, 57–82.

    Article  Google Scholar 

  22. Chen, H.-L., & Bondt, W. D. (2004). Style momentum within the S&P-500 index. Journal of Empirical Finance, 22, 483–507.

    Article  Google Scholar 

  23. Chen, N.-F., Kan, R., & Miller, M. H. (1993). Are the discounts on closed-End funds a sentiment index? Journal of Finance, 48(2), 795–800.

    Article  Google Scholar 

  24. Chiang, K. C. H., & Lee, M.-L. (2009). The role of correlated trading in setting REIT prices. Journal of Real Estate Finance and Economics, 41, 320–338.

    Article  Google Scholar 

  25. Choi, N., & Sias, R. W. (2009). Institutional industry herding. Journal of Financial Economics, 94, 469–491.

    Article  Google Scholar 

  26. Ciochetti, B. A., Craft, T. M., & Shilling, J. D. (2002). Institutional Investors’ preferences for REIT stocks. Real Estate Economics, 30(4), 567–593.

    Article  Google Scholar 

  27. Clayton, J., & MacKinnon, G. (2003a). Departures from NAV in REIT Pricing: The Private Real Estate Cycle, the Value of Liquidity and Investor Sentiment, RERI Working Paper, No. 106

  28. Clayton, J., & MacKinnon, G. (2003). The relative importance of stock, bond and real estate factors in explaining REIT returns. Journal of Real Estate Finance and Economics, 27(1), 39–60.

    Article  Google Scholar 

  29. Clayton, J., Ling, D. C., & Naranjo, A. (2009). Commercial real estate valuation: fundamentals versus investor sentiment. Journal of Real Estate Finance and Economics, 38, 5–37.

    Article  Google Scholar 

  30. Connolly, R. A., Stivers, C., & Sun, L. (2007). Commonality in the time-variation of stock-stock and stock–bond return comovements. Journal of Financial Markets, 10, 192–218.

    Article  Google Scholar 

  31. De Long, J. B., & Shleifer, A. (1992). Closed-end fund discounts. Journal of Portfolio Management, 18(2), 46–53.

    Article  Google Scholar 

  32. De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1989). The size and incidence of the losses from noise trading. Journal of Finance, 44(3), 681–696.

    Article  Google Scholar 

  33. De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990). Noise trader risk in financial markets. Journal of Political Economy, 98(4), 703–738.

    Article  Google Scholar 

  34. Devos, E., Ong, S.-E., Spieler, A. C., & Tsang, D. (2013). REIT institutional ownership dynamics and the financial crisis. Journal of Real Estate Finance and Economics, 47, 266–288.

    Article  Google Scholar 

  35. Dhar, R., & Goetzmann, W. N. (2006). Institutional perspectives on real estate investing. Journal of Portfolio Management, 32(4), 106–116.

    Article  Google Scholar 

  36. Doukas, J. A., & Milonas, N. T. (2004). Investor sentiment and the closed-end fund puzzle: Out-of-sample evidence. European Financial Management, 10(2), 235–266.

    Article  Google Scholar 

  37. Elton, E. J., Gruber, M. J., & Busse, J. A. (1998). Do investors care about sentiment? Journal of Business, 71(4), 477–500.

    Article  Google Scholar 

  38. Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3–56.

    Article  Google Scholar 

  39. Fei, P. D., Ding, L., & Deng, Y. (2010). Correlation and volatility dynamics in REIT returns: performance and portfolio considerations. Journal of Portfolio Management, 36(2), 113–125.

    Article  Google Scholar 

  40. Froot, K. A., & Dabora, E. M. (1999). How are stock prices affected by the location of trade? Journal of Financial Economics, 53, 189–216.

    Article  Google Scholar 

  41. Froot, K., & Teo, M. (2008). Style investing and institutional investors. Journal of Financial and Quantitative Analysis, 43(4), 883–906.

    Article  Google Scholar 

  42. Gallimore, P., & Gray, A. (2002). The role of investor sentiment in property investment decisions. Journal of Property Research, 19(2), 111–120.

    Article  Google Scholar 

  43. Gemmill, G., & Thomas, D. C. (2002). Noise trading, costly arbitrage, and asset prices: evidence from closed-end funds. Journal of Finance, 57(6), 2571–2594.

    Article  Google Scholar 

  44. Giliberto, S. M. (1990). Equity real estate investment trusts and real estate returns. Journal of Real Estate Research, 5(2), 259–263.

    Google Scholar 

  45. Glushkov, D., Moussawi, R., & Palacios, L. (2009). Institutional Ownership, Concentration, and Breadth Ratios Using Thomson Reuters 13F Data. WRDS Paper

  46. Goyenko, R. Y., & Ukhov, A. D. (2009). Stock and bond market liquidity: a long-Run empirical analysis. Journal of Financial and Quantitative Analysis, 44(1), 189–212.

    Article  Google Scholar 

  47. Graff, R. A., & Young, M. S. (1997). Serial persistence in equity REIT returns. Journal of Real Estate Research, 14(3), 183–214.

    Google Scholar 

  48. Green, T. C., & Hwang, B.-H. (2009). Price-based return comovement. Journal of Financial Economics, 93, 37–50.

    Article  Google Scholar 

  49. Ilmanen, A. (2003). Stock–bond correlations. Journal of Fixed Income, 13(2), 55–66.

    Article  Google Scholar 

  50. Knotek, E. (2007). How useful is Okun’s Law? federal reserve bank of Kansas city. Economic Review, 73–103.

  51. Kumar, A., & Lee, C. M. C. (2006). Retail investor sentiment and return comovements. Journal of Finance, 66(5), 2451–2486.

    Article  Google Scholar 

  52. Lee, C. M. C., Shleifer, A., & Thaler, R. H. (1991). Investor sentiment and the closed-End fund puzzle. Journal of Finance, 46(1), 75–109.

    Article  Google Scholar 

  53. Lee, M.-L., Lee, M.-T., & Chiang, K. C. H. (2008). Real estate risk exposure of equity real estate investment trusts. Journal of Real Estate Finance and Economics, 36, 165–181.

    Article  Google Scholar 

  54. Lin, C. Y., Rahman, H., & Yung, K. (2009). Investor sentiment and REIT returns. Journal of Real Estate Finance and Economics, 39, 450–471.

    Article  Google Scholar 

  55. Ling, D. C., Naranjo, A., & Scheick, B. (2013). Investor Sentiment, Limits to Arbitrage, and Private Market Returns. Real Estate Economics, in press.

  56. Liu, W. (2006). A liquidity-augmented capital asset pricing model. Journal of Financial Economics, 82, 631–671.

    Article  Google Scholar 

  57. Myer, F. C. N., & Webb, J. R. (1993). Return properties of equity REITs, common stocks and commercial real estate: a comparison. Journal of Real Estate Research, 8(1), 87–106.

    Google Scholar 

  58. Neal, R., & Wheatley, S. M. (1998). Do Measures of Investor Sentiment Predict Returns?. Journal of Financial And Quantitative Analysis, 33 (4), 523:547.

  59. Nofsinger, J. R., & Sias, R. W. (1999). Herding and feedback trading by institutional and individual investors. Journal of Finance, 54(6), 2263–2295.

    Article  Google Scholar 

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

    Article  Google Scholar 

  61. Pástor, L., & Stambaugh, R. F. (2003). Liquidity risk and expected stock returns. Journal of Political Economy, 111(3), 642–685.

    Article  Google Scholar 

  62. Pindyck, R. S., & Rotemberg, J. J. (1990). The excess Co-movement of commodity prices. Economic Journal, 100, 1173–1189.

    Article  Google Scholar 

  63. Pindyck, R. S., & Rotemberg, J. J. (1993). The comovement of stock prices. Quarterly Journal of Economics, 108(4), 1073–1103.

    Article  Google Scholar 

  64. Ro, S., & Gallimore, P. (2013). Real estate mutual funds: herding, momentum-trading and performance. Real Estate Economics, 42(1), 190–222.

    Article  Google Scholar 

  65. Schiller, R. J. (1989). Comovements in stock prices and comovements in dividends. Journal of Finance, 44(3), 719–729.

    Article  Google Scholar 

  66. Sias, R. W. (2004). Institutional herding. Review of Financial Studies, 17(1), 165–206.

    Article  Google Scholar 

  67. Sias, R. W., Starks, L. T., & Tinic, S. M. (2001). Is noise trader risk priced? Journal of Financial Research, 24(3), 311–329.

    Article  Google Scholar 

  68. Teo, M., & Woo, S.-J. (2004). Style effects in the cross-section of stock returns. Journal of Financial Economics, 74, 367–398.

    Article  Google Scholar 

  69. Vayanos, D. (2004). Flight to Quality, Flight to Liquidity, And the Pricing of Risk. NBER working paper 10327.

  70. Wahal, S., & Yavuz, M. D. (2013). Style investing, comovement and return predictability. Journal of Financial Economics, 107, 136–154.

    Article  Google Scholar 

  71. Yu, J., & Yuan, Y. (2011). Investor sentiment and the mean-variance relation. Journal of Financial Economics, 100(2), 367–381.

    Article  Google Scholar 

Download references

Acknowledgments

The authors would like to thank Seow Eng Ong, David Geltner, Piet Eichholtz, Andy Naranjo, David Downs, the participants of the 2013 Maastricht University-National University of Singapore-MIT (MNM) symposium and 2013 National AREUEA conference for their valuable comments. We also thank the Real Estate Research Corporation (RERC) for providing us with their data.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Julia Freybote.

Appendix

Appendix

Table 9 Data Description and Sources
Table 10 Descriptive Statistics by Period

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Das, P.K., Freybote, J. & Marcato, G. An Investigation into Sentiment-Induced Institutional Trading Behavior and Asset Pricing in the REIT Market. J Real Estate Finan Econ 51, 160–189 (2015). https://doi.org/10.1007/s11146-014-9490-z

Download citation

Keywords

  • Institutional investor sentiment
  • Flight to liquidity
  • Style investing
  • Asset pricing
  • Real estate