# Asymmetric Dependence in Real Estate Investment Trusts: An Asset-Pricing Analysis

- 403 Downloads

## Abstract

REITs are often assumed to be defensive assets having a low correlation with market returns. However, this dependence is not symmetric across the joint-return distribution. Disappointment-averse investors with state-dependent preferences attach (dis-)utility to investments exhibiting (lower-tail) upper-tail asymmetric dependence. We find strong empirical evidence that investors price this asymmetric dependence in the cross section of US REIT returns. In particular, we show that REIT stocks with lower-tail asymmetric dependence attract a risk premium averaging 1.3 % p.a. and REIT stocks exhibiting upper-tail asymmetric dependence are traded at discount averaging 5.8 % p.a. We find no evidence that the equity *β* is positively priced in US REIT returns. Our findings imply that traditional estimators of REIT cost of capital and performance measurement are likely to be substantially misrepresentative.

## Keywords

REITs Asymmetric dependence Asset pricing Tail risk Downside risk*β*

*J*

^{Adj}

## References

- Alcock, J., & Hatherley, A. (2009). Asymmetric dependence between domestic equity indices and its effect on portfolio construction.
*Australian Actuarial Journal*,*15*(1), 143–180.Google Scholar - Alcock, J., & Hatherley, A. (2016). Characterizing the asymmetric dependence. Forthcoming Review of Finance. doi: 10.1093/rof/rfw022.
- Alcock, J., & Steiner, E. (2016). Fundamental drivers of dependence in REIT returns. Forthcoming The Journal of Real Estate Finance and Economics. doi: 10.1007/s11146-016-9562-3.
- Alcock, J., Glascock, J., & Steiner, E. (2013). Manipulation in US REIT investment performance evaluation: Empirical evidence.
*The Journal of Real Estate Finance and Economics*,*47*(3), 434– 465.CrossRefGoogle Scholar - An, H., Hardin, W., & Wu, Z. (2012). Information asymmetry and corporate liquidity management: Evidence from real estate investment trusts.
*The Journal of Real Estate Finance and Economics*,*45*(3), 678–704.CrossRefGoogle Scholar - An, H., Wu, Q., & Wu, Z. (2015). REIT crash risk and institutional investors. The Journal of Real Estate Finance and Economics pp 1–32.Google Scholar
- Ang, A., & Bekaert, G. (2002). International asset allocation with regime shifts.
*Review of Financial Studies*,*15*(4), 1137–1187.CrossRefGoogle Scholar - Ang, A., & Chen, J. (2002). Asymmetric correlations of equity portfolios.
*Journal of Financial Economics*,*63*(3), 443–494.CrossRefGoogle Scholar - Ang, A., Chen, J., & Xing, Y. (2006). Downside risk.
*Review of Financial Studies*,*19*(4), 1191–1239.CrossRefGoogle Scholar - Bali, T.G., Demirtas, K.O., & Levy, H. (2009). Is there an intertemporal relation between downside risk and expected returns?
*Journal of Financial and Quantitative Analysis*,*44*(04), 883–909.CrossRefGoogle Scholar - Belsley, D.A. (1991). A guide to using the collinearity diagnostics.
*Computer Science in Economics and Management*,*4*(1), 33–50.Google Scholar - Bianchi, D., & Guidolin, M. (2014). Can linear predictability models time bull and bear real estate markets? Out-of-sample evidence from REIT portfolios.
*The Journal of Real Estate Finance and Economics*,*49*(1), 116–164.CrossRefGoogle Scholar - Bollerslev, T., & Todorov, V. (2011). Tails, fears, and risk premia.
*The Journal of Finance*,*66*(6), 2165–2211.CrossRefGoogle Scholar - Bradley, M., Capozza, D.R., & Seguin, P.J. (1998). Dividend policy and cash-flow uncertainty.
*Real Estate Economics*,*26*(4), 555–580.CrossRefGoogle Scholar - Campbell, J.Y., & Yogo, M. (2006). Efficient tests of stock return predictability.
*Journal of Financial Economics*,*81*(1), 27–60.CrossRefGoogle Scholar - Campbell, J.Y., Lettau, M., Malkiel, B.G., & Xu, Y. (2001). Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk.
*Journal of finance*,*56*(1).Google Scholar - Case, B., Hardin, W.G., & Wu, Z. (2012a). REIT dividend policies and dividend announcement effects during the 2008–2009 liquidity crisis.
*Real Estate Economics*,*40*(3), 387–421.Google Scholar - Case, B., Yang, Y., & Yildirim, Y. (2012b). Dynamic correlations among asset classes: REIT and stock returns.
*The Journal of Real Estate Finance and Economics*,*44*(3), 298–318.Google Scholar - Chan, K.C., Hendershott, P.H., & Sanders, A.B. (1990). Risk and return on real estate: Evidence from equity REITs.
*Real Estate Economics*,*18*(4), 431–452.CrossRefGoogle Scholar - Chatrath, A., Liang, Y., & McIntosh, W. (2000). The asymmetric REIT-beta puzzle.
*Journal of Real Estate Portfolio Management*,*6*(2), 101–111.Google Scholar - James, C.S.S., & Miffre, J. (2009). Conditional correlations and Real Estate Investment Trusts.
*Journal of Real Estate Portfolio Management*,*15*(2), 173–184.Google Scholar - Clayton, J., & MacKinnon, G. (2003). The relative importance of stock, bond and real estate factors in explaining REIT returns.
*The Journal of Real Estate Finance and Economics*,*27*(1), 39–60.CrossRefGoogle Scholar - Das, P.K., Freybote, J., & Marcato, G. (2015). An investigation into sentiment-induced institutional trading behavior and asset pricing in the REIT market. The Journal of Real Estate Finance and Economics pp 1–30.Google Scholar
- Devos, E., Ong, S.E., Spieler, A.C., & Tsang, D. (2013). REIT institutional ownership dynamics and the financial crisis.
*The Journal of Real Estate Finance and Economics*,*47*(2), 266–288.CrossRefGoogle Scholar - Diamond, D.W., & Rajan, R.G. (2009). The credit crisis: Conjectures about causes and remedies.
*The American Economic Review*,*99*(2), 606.CrossRefGoogle Scholar - Erb, C.B., Harvey, C.R., & Viskanta, T.E. (1994). Forecasting international equity correlations.
*Financial analysts journal*,*50*(6), 32–45.CrossRefGoogle Scholar - Fama, E.F., & MacBeth, J.D. (1973). Risk, return, and equilibrium: Empirical tests. The Journal of Political Economy pp 607–636.Google Scholar
- Fernandez, P., Linares, P., & Fernández acín, I. (2014). Market risk premium used in 88 countries in 2014: A survey with 8,228 answers. Available at SSRN 2450452.Google Scholar
- Fu, F. (2009). Idiosyncratic risk and the cross-section of expected stock returns.
*Journal of Financial Economics*,*91*(1), 24–37.CrossRefGoogle Scholar - Genest, C., Gendron, M., & Bourdeau-Brien, M. (2009). The advent of copulas in finance.
*The European Journal of Finance*,*15*(7-8), 609–618.CrossRefGoogle Scholar - Ghosh, C., & Sirmans, C. (2003). Board independence, ownership structure and performance: evidence from real estate investment trusts.
*The Journal of Real Estate Finance and Economics*,*26*(2-3), 287–318.CrossRefGoogle Scholar - Glascock, J., & Hughes, W. (1995). NAREIT identified exchange listed REITs and their performance characteristics: 1972-1991.
*Journal of Real Estate Literature*,*3*(1), 63–83.Google Scholar - Glascock, J.L., Michayluk, D., & Neuhauser, K. (2004). The riskiness of REITs surrounding the October 1997 stock market decline.
*The Journal of Real Estate Finance and Economics*,*28*(4), 339–354.CrossRefGoogle Scholar - Goetzmann, W., Ingersoll, J., Spiegel, M., & Welch, I. (2007). Portfolio performance manipulation and manipulation-proof performance measures.
*Review of Financial Studies*,*20*(5), 1503–1546.CrossRefGoogle Scholar - Goldstein, M.A. (1999). REIT return behavior in advancing and declining stock markets. Real Estate Finance.Google Scholar
- Grant, S., & Kajii, A. (1998). AUSI expected utility: An anticipated utility theory of relative disappointment aversion.
*Journal of Economic Behavior & Organization*,*37*(3), 277–290.CrossRefGoogle Scholar - Grant, S., Kajii, A., & Polak, B. (2001). Different notions of disappointment aversion.
*Economics Letters*,*70*(2), 203–208.CrossRefGoogle Scholar - Gul, F. (1991). A theory of disappointment aversion. Econometrica: Journal of the Econometric Society pp 667–686.Google Scholar
- Hartmann, P., Straetmans, S., & De Vries, C.G. (2004). Asset market linkages in crisis periods.
*Review of Economics and Statistics*,*86*(1), 313–326.CrossRefGoogle Scholar - Harvey, C.R., Liu, Y., & Zhu, H. (2014). ANd the cross-section of expected returns. Tech. rep., National Bureau of Economic Research.Google Scholar
- Hatherley, A., & Alcock, J. (2007). Portfolio construction incorporating asymmetric dependence structures: A user’s guide.
*Accounting & Finance*,*47*(3), 447–472.CrossRefGoogle Scholar - Hill, M.D., Kelly, G.W., & Hardin, I.I.I.W.G. (2012). Market value of REIT liquidity.
*The Journal of Real Estate Finance and Economics*,*45*(2), 383–401.CrossRefGoogle Scholar - Hoesli, M., & Reka, K. (2013). Volatility spillovers, comovements and contagion in securitized real estate markets.
*The Journal of Real Estate Finance and Economics*,*47*(1), 1–35.CrossRefGoogle Scholar - Hong, Y., Tu, J., & Zhou, G. (2007). Asymmetries in stock returns: Statistical tests and economic evaluation.
*Review of Financial Studies*,*20*(5), 1547–1581.CrossRefGoogle Scholar - Howe, J.S., & Shilling, J.D. (1990). REIT advisor performance.
*Real Estate Economics*,*18*(4), 479–500.CrossRefGoogle Scholar - Jz, H., & Zhong, Z.K. (2013). Time variation in diversification benefits of commodity, REITs, and TIPS.
*The Journal of Real Estate Finance and Economics*,*46*(1), 152–192.CrossRefGoogle Scholar - Huang, M., & Wu, C.C. (2015). Economic benefits and determinants of extreme dependences between REIT and stock returns.
*Review of Quantitative Finance and Accounting*,*44*(2), 299–327.CrossRefGoogle Scholar - Hung, S.Y.K., & Glascock, J.L. (2008). Momentum profitability and market trend: evidence from REITs.
*The Journal of Real Estate Finance and Economics*,*37*(1), 51–69.CrossRefGoogle Scholar - Jensen, M.C. (1986). Agency cost of free cash flow, corporate finance, and takeovers. Corporate Finance, and Takeovers American Economic Review,
*76*(2).Google Scholar - Knight, J., Lizieri, C., & Satchell, S. (2005). Diversification when it hurts? The joint distributions of real estate and equity markets 1.
*Journal of Property Research*,*22*(04), 309–323.CrossRefGoogle Scholar - Kwon, Y.K. (1985). Derivation of the capital asset pricing model without norMality or quadratic preference: a note.
*The Journal of Finance*,*40*(5), 1505–1509.CrossRefGoogle Scholar - Lizieri, C., & Satchell, S. (1997a). Interactions between property and equity markets: An investigation of linkages in the United Kingdom 1972–1992.
*The Journal of Real Estate Finance and Economics*,*15*(1), 11–26.Google Scholar - Lizieri, C., & Satchell, S. (1997b). Property company performance and real interest rates: a regime-switching approach.
*Journal of Property Research*,*14*(2), 85–97.Google Scholar - Lizieri, C., Satchell, S., & Zhang, Q. (2007). The underlying return-generating factors for REIT returns: an application of independent component analysis.
*Real Estate Economics*,*35*(4), 569–598.CrossRefGoogle Scholar - Longin, F., & Solnik, B. (2001). Extreme correlation of international equity markets. Journal of Finance pp 649–676.Google Scholar
- Low, R.K.Y., Alcock, J., Faff, R., & Brailsford, T. (2013). Canonical vine copulas in the context of modern portfolio management: Are they worth it?
*Journal of Banking & Finance*,*37*(8), 3085–3099.CrossRefGoogle Scholar - Merton, R.C. (1987). Presidential address: a simple model of capital market equilibrium.
*Journal of Finance*,*42*, 483–510.CrossRefGoogle Scholar - Newey, W.K., & West, K.D. (1987). A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix.
*Econometrica*,*55*(3), 703–708.CrossRefGoogle Scholar - Newey, W.K., & West, K.D. (1994). Automatic lag selection in covariance matrix estimation.
*The Review of Economic Studies*,*61*(4), 631–653.CrossRefGoogle Scholar - Pai, A., & Geltner, D. (2007). Stocks are from Mars, real estate is from Venus Journal of Portfolio Management p 134.Google Scholar
- Patel, K., & Nimmanunta, K. (2009). Tail dependence in REIT returns. Tech. rep., European Real Estate Society (ERES).Google Scholar
- Patton, A.J. (2004). On the out-of-sample importance of skewness and asymmetric dependence for asset allocation.
*Journal of Financial Econometrics*,*2*(1), 130–168.CrossRefGoogle Scholar - Post, T., & Van Vliet, P. (2006). Downside risk and asset pricing.
*Journal of Banking & Finance*,*30*(3), 823–849.Google Scholar - Rong, N., & Trück, S. (2010). Returns of REITs and stock markets: Measuring dependence and risk.
*Journal of Property Investment & Finance*,*28*(1), 34–57.CrossRefGoogle Scholar - Simon, S., & Ng, W.L. (2009). The effect of the real estate downturn on the link between REITs and the stock market.
*Journal of Real Estate Portfolio Management*,*15*(3), 211–219.Google Scholar - Skiadas, C. (1997). Conditioning and aggregation of preferences.
*Econometrica*,*65*(2), 347–367.CrossRefGoogle Scholar - Stapleton, R.C., & Subrahmanyam, M.G. (1983). The market model and capital asset pricing theory: a note.
*The Journal of Finance*,*38*(5), 1637–1642.CrossRefGoogle Scholar - Sun, L., Titman, S.D., & Twite, G.J. (2015). REIT and commercial real estate returns: A postmortem of the financial crisis.
*Real Estate Economics*,*43*(1), 8–36.CrossRefGoogle Scholar - Zhou, J., & Anderson, R.I. (2012). Extreme risk measures for international REIT markets.
*The Journal of Real Estate Finance and Economics*,*45*(1), 152–170.CrossRefGoogle Scholar - Zhou, J., & Anderson, R.I. (2013). An empirical investigation of herding behavior in the US REIT market.
*The Journal of Real Estate Finance and Economics*,*47*(1), 83–108.CrossRefGoogle Scholar - Zimmer, D.M. (2015). Asymmetric dependence in house prices: evidence from usa and international data.
*Empirical Economics*,*49*(1), 161–183.CrossRefGoogle Scholar