Asymmetric Dependence in Real Estate Investment Trusts: An Asset-Pricing Analysis
Published at the Journal of Real Estate Finance and Economics, January 2017
Awarded the EPRA Prize for the Best Paper in Listed Real Estate, 3rd ERES Conference
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.
Presented at: the 3rd ERES Annual Conference in Regensburg
Refereed Research Reports
Asset Price Bubbles in the Australian Market
Abstract: A study of market bubbles is generally considered a test of market efficiency (or inefficiency) since bubbles are concerned with rising prices that are detached from their fundamental values. Verifying the existence of such an ineciency requires us to be able to appropriately formulate fundamental value, which typically assumes homogeneous and rational investors. Requiring additional attention is the issue of persistence. Cochrane (1991) and Chung and Lee (1998) suggest that deviations, which slowly return to fundamental values, are more indicative of a ‘fad’ as opposed to a bubble. As such, an additional dimension in this definition is associated with the duration of the inefficiency.