Random walks and market efficiency: evidence from real estate investment trusts (REIT) subsectors
Abstract
This paper investigates the random walk behavior of real estate investment trust (REIT) subsectors using monthly return data from January 1994 to July 2015. Using variance ratio tests, we examine subsectors of lodging/resorts and self-storage and find that they do not follow a random walk, contradicting the weak-form efficient market hypothesis. Non-parametric runs tests help us find that office, industrial, mixed, free standing, shopping centers, apartments, manufactured homes, and timberland subsectors are weak-form efficient. The evidence in this study supports the idea that some subsec-tors are more informationally efficient than other subsectors.
Keyword : random walk, market efficiency, Real estate investment trust (REIT) subsectors, variance ratio, Runs test
How to Cite
Almudhaf, F., & Hansz, A. J. (2018). Random walks and market efficiency: evidence from real estate investment trusts (REIT) subsectors. International Journal of Strategic Property Management, 22(2), 81-92. https://doi.org/10.3846/ijspm.2018.440
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Akinsomi, O., Aye, G. C., Babalos, V., Economou, F., & Gupta, R. (2016). Real estate returns predictability revisited: novel evidence from the US REITs market. Empirical Economics, 51(3), 1165-1190. https://doi.org/10.1007/s00181-015-1037-5
Assaf, A. (2015). Long memory and level shifts in REITs returns and volatility. International Review of Financial Analysis, 42, 172-182. https://doi.org/10.1016/j.irfa.2015.06.004
Bianchi, D., Guidolin, M., & Ravazollo, F. (2013). What makes residential different from non-residential REITs? Evidence from multi-factor asset pricing models. Working paper presented at ASSA conference, San Diego.
Block, R. (2012). Investing in REITs (4th ed.). New Jersey: Wiley. https://doi.org/10.1002/9781119202325
Brock, W., Lakonishok, J., & Lebaron, B. (1992). Simple technical trading rules and the stochastic properties of stock returns. Journal of Finance, 47(5), 1731-1764. https://doi.org/10.1111/j.1540-6261.1992.tb04681.x
Chong, J., Krystalogianni, A., & Stevenson, S. (2012). Dynamic correlations between REIT subsectors and the implicationsfor diversification. Applied Financial Economics, 22, 1089-1109. https://doi.org/10.1080/09603107.2011.639735
Chui, A. C., Titman, S., & Wei, K. J. (2003). Intra-industry momentum: the case of REITs. Journal of Financial Markets, 6(3), 363-387. https://doi.org/10.1016/S1386-4181(03)00002-8
Cotter, J., & Stevenson, S. (2008). Modeling long memory in REITs. Real Estate Economics, 36(3), 533-554. https://doi.org/10.1111/j.1540-6229.2008.00221.x
Feng, Z., Price, S. M., & Sirmans, C. F. (2014). The relation between momentum and drift: industry-level evidence from equity Real Estate Investment Trusts (REITs). Journal of Real Estate Research, 36(3), 383-407.
Gibbons, M. R., Ross, S. A., & Shanken, J. (1989). A test of the efficiency of a given portfolio. Econometrica, 57(5), 1121-1152. https://doi.org/10.2307/1913625
Goebel, P. R., Harrison, D. M., Mercer, J. M., & Whitby, R. J. (2013). REIT momentum and characteristic-related REIT returns. Journal of Real Estate Finance and Economics, 47(3), 564-581. https://doi.org/10.1007/s11146-012-9371-2
Granger, C. W., & Joyeux, R. (1980). An introduction to long‐memory time series models and fractional differencing. Journal of Time Series Analysis, 1(1), 15-29. https://doi.org/10.1111/j.1467-9892.1980.tb00297.x
Hao, Y., Chu, H. H., Ko, K. C., & Lin, L. (2016). Momentum strategies and investor sentiment in the REIT market. International Review of Finance, 16(1), 41-71. https://doi.org/10.1111/irfi.12060
Ho, K. H. D., & Tay, S. J. (2016). REIT market efficiency through a binomial option pricing tree approach. Journal of Property Investment & Finance, 34(5), 496-520. https://doi.org/10.1108/JPIF-01-2016-0004
Hoesli, M., & Oikarinen, E. (2012). Are REITs real estate? Evidence from international sector level data. Journal of International Money and Finance, 31(7), 1823-1850. https://doi.org/10.1016/j.jimonfin.2012.05.017
Hui, E. C. M., Wright, J. A., & Yam, S. C. P. (2014). Calendar effects and real estate securities. Journal of Real Estate Finance and Economics, 49(1), 91-115. https://doi.org/10.1007/s11146-012-9398-4
Hui, E. C. M., & Yam, S. C. P. (2014). Can we beat the “buy-and-hold” strategy? Analysis on European and American securitized real estate indices. International Journal of Strategic Property Management, 18(1), 28-37. https://doi.org/10.3846/1648715X.2013.862190
Hung, S. Y. K., & Glascock, J. L. (2008). Momentum profitability and market trend: evidence from REITs. Journal of Real Estate Finance and Economics, 37(1), 51-69. https://doi.org/10.1007/s11146-007-9056-4
Jirasakuldech, B., & Knight, J. (2005). Efficiency in the market for REITs: further evidence. Journal of Real Estate Portfolio Management, 11, 123-132.
Jobson, J. D., & Korkie, B. M. (1981). Performance hypothesis testing with the Sharpe and Treynor measures. Journal of Finance, 36(4), 889-908. https://doi.org/10.1111/j.1540-6261.1981.tb04891.x
Kleiman, R., Payne, J., & Sahu, A. (2002). Random walks and market efficiency: evidence from international real estate markets. Journal of Real Estate Research, 24, 279-297.
Kuhle, J., & Alvayay, J. (2000). The efficiency of equity REIT prices. Journal of Real Estate Portfolio Management, 6, 349-354.
Lee, M. T., Lee, M. L., Chiu, B. H., & Lee, C. L. (2014). Do lunar phases affect US REIT returns?. Investment Analysts Journal, 43(79), 67-78.
Lee, M., & Chiang, K. (2004). Substitutability between equity REITs and mortgage REITs. Journal of Real Estate Research, 26, 95-113.
Liow, K. H. (2009). Long-term memory in volatility: some evidence from international securitized real estate markets. Jour-nal of Real Estate Finance and Economics, 39(4), 415-438. https://doi.org/10.1007/s11146-008-9120-8
Lo, A., & Mackinlay, A. (1988). Stock market prices do not follow random walks: evidence from a simple specification test. Review of Financial Studies, 1, 41-66. https://doi.org/10.1093/rfs/1.1.41
Lo, A., & Mackinlay, A. (1989). The size and power variance ratio test in finite samples: a Monte Carlo investigation. Journal of Econometrics, 40, 203-238. https://doi.org/10.1016/0304-4076(89)90083-3
Mei, J., & Gao, B. (1995). Price reversal, transaction costs, and arbitrage profits in the real estate securities market. Journal of Real Estate Finance and Economics, 11, 153-165. https://doi.org/10.1007/BF01098659
Oikarinen, E., Hoesli, M., & Serrano, C. (2010). Response speeds of direct and securitized real estate to shocks in the fundamentals. Discussion Paper No. 60. Aboa Centre for Economics, Turku.
Opdyke, J. D. J. (2007). Comparing Sharpe ratios: so where are the p-values?. Journal of Asset Management, 8(5), 308-336. https://doi.org/10.1057/palgrave.jam.2250084
Pavlova, I., Cho, J. H., Parhizgari, A. M., & Hardin III, W. G. (2014). Long memory in REIT volatility and changes in the unconditional mean: a modified FIGARCH approach. Journal of Property Research, 31(4), 315-332. https://doi.org/10.1080/09599916.2013.877063
Payne, J. (2006). Further evidence on the transmission of shocks across REIT markets: an examination of REIT subsectors. Applied Financial Economics Letters, 2, 141-146. https://doi.org/10.1080/17446540500447629
Payne, J., & Waters, G. (2007). Have equity REITs experienced periodically collapsing bubbles?. Journal of Real Estate Finance and Economics, 34, 207-224. https://doi.org/10.1007/s11146-007-9007-0
Schindler, F. (2011). Market efficiency and return predictability in the emerging securitized real estate markets. Journal of Real Estate Literature, 19, 111-150.
Schindler, F., Rottke, N., & Fuss, R. (2010). Testing the predictability and efficiency of securitized real estate markets. Journal of Real Estate Portfolio Management, 16, 171-191.
Stevenson, S. (2002). Momentum effects and mean reversion in real estate securities. Journal of Real Estate Research, 23, 47-64.
Su, J., Cheung, A., & Roca, E. (2012). Are securitized real estate markets efficient? New international evidence based on an improved automatic portmanteau test. Economic Modelling, 29, 684-690. https://doi.org/10.1016/j.econmod.2012.01.015
Vogelsang, T. J., & Perron, P. (1998). Additional tests for a unit root allowing for a break in the trend function at an unknown time. International Economic Review, 39(4), 1073-1100. https://doi.org/10.2307/2527353
Wright, J. (2000). Alternative variance ratio tests using ranks and signs. Journal of Business and Economics Statistics, 18, 1-9.
Yavas, A., & Yildirim, Y. (2011). Price discovery in real estate markets: a dynamic analysis. Journal of Real Estate Finance and Economics, 42(1), 1-29. https://doi.org/10.1007/s11146-009-9172-4
Zhou, J. (2011). Long memory in REIT volatility revisited: genuine or spurious, and self-similar?, Journal of Property Research, 28(3), 213-232. https://doi.org/10.1080/09599916.2011.577903
Zhou, J., & Lee, J. M. (2013). Adaptive market hypothesis: evidence from the REIT market. Applied Financial Economics, 23(21), 1649-1662. https://doi.org/10.1080/09603107.2013.844326
Akinsomi, O., Aye, G. C., Babalos, V., Economou, F., & Gupta, R. (2016). Real estate returns predictability revisited: novel evidence from the US REITs market. Empirical Economics, 51(3), 1165-1190. https://doi.org/10.1007/s00181-015-1037-5
Assaf, A. (2015). Long memory and level shifts in REITs returns and volatility. International Review of Financial Analysis, 42, 172-182. https://doi.org/10.1016/j.irfa.2015.06.004
Bianchi, D., Guidolin, M., & Ravazollo, F. (2013). What makes residential different from non-residential REITs? Evidence from multi-factor asset pricing models. Working paper presented at ASSA conference, San Diego.
Block, R. (2012). Investing in REITs (4th ed.). New Jersey: Wiley. https://doi.org/10.1002/9781119202325
Brock, W., Lakonishok, J., & Lebaron, B. (1992). Simple technical trading rules and the stochastic properties of stock returns. Journal of Finance, 47(5), 1731-1764. https://doi.org/10.1111/j.1540-6261.1992.tb04681.x
Chong, J., Krystalogianni, A., & Stevenson, S. (2012). Dynamic correlations between REIT subsectors and the implicationsfor diversification. Applied Financial Economics, 22, 1089-1109. https://doi.org/10.1080/09603107.2011.639735
Chui, A. C., Titman, S., & Wei, K. J. (2003). Intra-industry momentum: the case of REITs. Journal of Financial Markets, 6(3), 363-387. https://doi.org/10.1016/S1386-4181(03)00002-8
Cotter, J., & Stevenson, S. (2008). Modeling long memory in REITs. Real Estate Economics, 36(3), 533-554. https://doi.org/10.1111/j.1540-6229.2008.00221.x
Feng, Z., Price, S. M., & Sirmans, C. F. (2014). The relation between momentum and drift: industry-level evidence from equity Real Estate Investment Trusts (REITs). Journal of Real Estate Research, 36(3), 383-407.
Gibbons, M. R., Ross, S. A., & Shanken, J. (1989). A test of the efficiency of a given portfolio. Econometrica, 57(5), 1121-1152. https://doi.org/10.2307/1913625
Goebel, P. R., Harrison, D. M., Mercer, J. M., & Whitby, R. J. (2013). REIT momentum and characteristic-related REIT returns. Journal of Real Estate Finance and Economics, 47(3), 564-581. https://doi.org/10.1007/s11146-012-9371-2
Granger, C. W., & Joyeux, R. (1980). An introduction to long‐memory time series models and fractional differencing. Journal of Time Series Analysis, 1(1), 15-29. https://doi.org/10.1111/j.1467-9892.1980.tb00297.x
Hao, Y., Chu, H. H., Ko, K. C., & Lin, L. (2016). Momentum strategies and investor sentiment in the REIT market. International Review of Finance, 16(1), 41-71. https://doi.org/10.1111/irfi.12060
Ho, K. H. D., & Tay, S. J. (2016). REIT market efficiency through a binomial option pricing tree approach. Journal of Property Investment & Finance, 34(5), 496-520. https://doi.org/10.1108/JPIF-01-2016-0004
Hoesli, M., & Oikarinen, E. (2012). Are REITs real estate? Evidence from international sector level data. Journal of International Money and Finance, 31(7), 1823-1850. https://doi.org/10.1016/j.jimonfin.2012.05.017
Hui, E. C. M., Wright, J. A., & Yam, S. C. P. (2014). Calendar effects and real estate securities. Journal of Real Estate Finance and Economics, 49(1), 91-115. https://doi.org/10.1007/s11146-012-9398-4
Hui, E. C. M., & Yam, S. C. P. (2014). Can we beat the “buy-and-hold” strategy? Analysis on European and American securitized real estate indices. International Journal of Strategic Property Management, 18(1), 28-37. https://doi.org/10.3846/1648715X.2013.862190
Hung, S. Y. K., & Glascock, J. L. (2008). Momentum profitability and market trend: evidence from REITs. Journal of Real Estate Finance and Economics, 37(1), 51-69. https://doi.org/10.1007/s11146-007-9056-4
Jirasakuldech, B., & Knight, J. (2005). Efficiency in the market for REITs: further evidence. Journal of Real Estate Portfolio Management, 11, 123-132.
Jobson, J. D., & Korkie, B. M. (1981). Performance hypothesis testing with the Sharpe and Treynor measures. Journal of Finance, 36(4), 889-908. https://doi.org/10.1111/j.1540-6261.1981.tb04891.x
Kleiman, R., Payne, J., & Sahu, A. (2002). Random walks and market efficiency: evidence from international real estate markets. Journal of Real Estate Research, 24, 279-297.
Kuhle, J., & Alvayay, J. (2000). The efficiency of equity REIT prices. Journal of Real Estate Portfolio Management, 6, 349-354.
Lee, M. T., Lee, M. L., Chiu, B. H., & Lee, C. L. (2014). Do lunar phases affect US REIT returns?. Investment Analysts Journal, 43(79), 67-78.
Lee, M., & Chiang, K. (2004). Substitutability between equity REITs and mortgage REITs. Journal of Real Estate Research, 26, 95-113.
Liow, K. H. (2009). Long-term memory in volatility: some evidence from international securitized real estate markets. Jour-nal of Real Estate Finance and Economics, 39(4), 415-438. https://doi.org/10.1007/s11146-008-9120-8
Lo, A., & Mackinlay, A. (1988). Stock market prices do not follow random walks: evidence from a simple specification test. Review of Financial Studies, 1, 41-66. https://doi.org/10.1093/rfs/1.1.41
Lo, A., & Mackinlay, A. (1989). The size and power variance ratio test in finite samples: a Monte Carlo investigation. Journal of Econometrics, 40, 203-238. https://doi.org/10.1016/0304-4076(89)90083-3
Mei, J., & Gao, B. (1995). Price reversal, transaction costs, and arbitrage profits in the real estate securities market. Journal of Real Estate Finance and Economics, 11, 153-165. https://doi.org/10.1007/BF01098659
Oikarinen, E., Hoesli, M., & Serrano, C. (2010). Response speeds of direct and securitized real estate to shocks in the fundamentals. Discussion Paper No. 60. Aboa Centre for Economics, Turku.
Opdyke, J. D. J. (2007). Comparing Sharpe ratios: so where are the p-values?. Journal of Asset Management, 8(5), 308-336. https://doi.org/10.1057/palgrave.jam.2250084
Pavlova, I., Cho, J. H., Parhizgari, A. M., & Hardin III, W. G. (2014). Long memory in REIT volatility and changes in the unconditional mean: a modified FIGARCH approach. Journal of Property Research, 31(4), 315-332. https://doi.org/10.1080/09599916.2013.877063
Payne, J. (2006). Further evidence on the transmission of shocks across REIT markets: an examination of REIT subsectors. Applied Financial Economics Letters, 2, 141-146. https://doi.org/10.1080/17446540500447629
Payne, J., & Waters, G. (2007). Have equity REITs experienced periodically collapsing bubbles?. Journal of Real Estate Finance and Economics, 34, 207-224. https://doi.org/10.1007/s11146-007-9007-0
Schindler, F. (2011). Market efficiency and return predictability in the emerging securitized real estate markets. Journal of Real Estate Literature, 19, 111-150.
Schindler, F., Rottke, N., & Fuss, R. (2010). Testing the predictability and efficiency of securitized real estate markets. Journal of Real Estate Portfolio Management, 16, 171-191.
Stevenson, S. (2002). Momentum effects and mean reversion in real estate securities. Journal of Real Estate Research, 23, 47-64.
Su, J., Cheung, A., & Roca, E. (2012). Are securitized real estate markets efficient? New international evidence based on an improved automatic portmanteau test. Economic Modelling, 29, 684-690. https://doi.org/10.1016/j.econmod.2012.01.015
Vogelsang, T. J., & Perron, P. (1998). Additional tests for a unit root allowing for a break in the trend function at an unknown time. International Economic Review, 39(4), 1073-1100. https://doi.org/10.2307/2527353
Wright, J. (2000). Alternative variance ratio tests using ranks and signs. Journal of Business and Economics Statistics, 18, 1-9.
Yavas, A., & Yildirim, Y. (2011). Price discovery in real estate markets: a dynamic analysis. Journal of Real Estate Finance and Economics, 42(1), 1-29. https://doi.org/10.1007/s11146-009-9172-4
Zhou, J. (2011). Long memory in REIT volatility revisited: genuine or spurious, and self-similar?, Journal of Property Research, 28(3), 213-232. https://doi.org/10.1080/09599916.2011.577903
Zhou, J., & Lee, J. M. (2013). Adaptive market hypothesis: evidence from the REIT market. Applied Financial Economics, 23(21), 1649-1662. https://doi.org/10.1080/09603107.2013.844326