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The Continuing Overreaction in the REIT Market

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Abstract

We find that REITs, which are most held by institutional investors and are characterized as being passive investment instruments, exhibit price continuing overreaction. The empirical results show that buying REITs with an upward continuing overreaction and shorting REITs with a downward continuing overreaction yields a significant positive return, and that the return patterns reverse in the long run. We further find that the continuing overreaction comes from the trading of active mutual funds, suggesting that active fund managers exhibit the biases of overconfidence and self-attribution. Finally, we show that market continuation and high information uncertainty amplify the degree of continuing overreaction.

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Notes

  1. See, for example, Barber and Odean (2000), Jin et al. (2015), Kumar (2009), Odean (1999), Puetz and Ruenzi (2011), among others.

  2. Aguilar et al. (2018) find that passive institutional investors have dominated REIT ownership since the inclusion of REITs in the S&P indices from year 2001. They show that passive institutions held 42% of REITs in 2014, while this number is only 22% for non-REITs the same year.

  3. Thomson-Reuters classified institutions into five manager types. However, this classification is miss-matched starting from 1998 and beyond due to a mapping error. We re-classify those institutions in category 5 back to their classifications defined before Q4 1997.

  4. We classify mutual funds as active/passive funds by whether they are above/below the median mutual fund churn rate, which is a measure of how active a mutual fund is. Please refer to Equation (4) in the section of Data and Methodology. Institutional holdings data are collected from Thomson Reuters.

  5. Please refer to Daniel et al. (1998) and Daniel and Hirshleifer (2015) for a deeper discussion. We thank the referee for suggesting we elaborate on the difference between “continuing overreaction” and “overreaction.”

  6. See Chou and Wang (2011) and Statman et al. (2006) for detailed discussions of the disposition effect hypothesis.

  7. The literature notes that changes in management style and the evolution of the umbrella partnership REIT structure make post-1990 REITs more difficult to value. See Chui et al. (2003b) and Ling and Ryngaert (1997) for a detailed discussion.

  8. We thank Professor French for providing the returns on the risk factors and the one-month T-bill rates on his website: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/index.html.

  9. We additionally conduct the portfolio analysis using J = 6, 9, 18. The results are qualitatively similar.

  10. To capture the trend in the level of investor overconfidence, the weights are taken as increasing over time. Byun et al. (2016) argue, “The specific values of the weights do not affect the results much, as long as the weights are increasing over time.” Their results are similar when they use several different weighting schemes.

  11. Gervais and Odean (2001) and Odean (1998) theoretically show that an overconfident investor tends to trade more, which is supported by the experimental evidence in Deaves et al. (2009). Therefore, trading volume is a reasonable proxy for investor overconfidence.

  12. The other alternative to measure uncertainty is by the inverse of analyst coverage. However, analyst coverages for REITs are very few before year 2000, we do not apply analyst coverage as the uncertainty proxy. We thank an anonymous referee for this suggestion.

  13. To reliably measure idiosyncratic volatility, we require at least 200 daily returns to be available over the period of months t-11 to t.

  14. Due to the concern of double counting, the trading volumes of REITs traded in NASDAQ are divided by two. Chui et al. (2003a) applies a similar approach.

  15. The CAPM, Fama and French (1993) three-factor model, and Carhart (1997) four-factor model are employed by Derwall et al. (2009) to evaluate the performance of REIT mutual funds.

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Authors and Affiliations

  1. Department of Finance, College of Management, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd, Taipei, 10617, Taiwan

    Ming-Yu Liu

  2. Department of International Business, College of Management, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd, Taipei, 10617, Taiwan

    Chiuling Lu

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  1. Ming-Yu Liu
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Liu, MY., Lu, C. The Continuing Overreaction in the REIT Market. J Real Estate Finan Econ 61, 129–149 (2020). https://doi.org/10.1007/s11146-019-09707-x

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