Idiosyncratic risk and spillover effect in REIT returns
Abstract
Nowadays, idiosyncratic risk has substantial impacts on the risk control of portfolio construction. However, little research has been done on the spillover effect of idiosyncratic risk from global markets in REIT returns. A risk-return model is developed to examine the effects of idiosyncratic risk and its spillover on the short-run dynamics of REIT returns in 10 major REIT markets between 2001 and 2014. Variance decomposition provides evidence that idiosyncratic risk exceeds market risk most of the time. The risk-return models demonstrate that the spillover effect of idiosyncratic risk globally played a more significant role than idiosyncratic risk in the return dynamics during the subprime mortgage crisis. Furthermore, we analyse the asymmetric responses of volatility in REIT returns. The results show that the Netherlands is the most strongly preferred market in terms of earning excess returns, while the US market is unique in that the idiosyncratic risk and spillover effect tend to enlarge the fluctuations in REIT returns.
Keyword : asymmetric adjustment, idiosyncratic risk, risk-return model, spillover effect, variance decomposition
How to Cite
Hui, E. C., & Wang, Z. (2018). Idiosyncratic risk and spillover effect in REIT returns. International Journal of Strategic Property Management, 22(6), 457-470. https://doi.org/10.3846/ijspm.2018.6271
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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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, 1-43. https://doi.org/10.1111/0022-1082.00318
Case, B., Goetzmann, W. N., & Rouwenhorst, K. G. (2000). Global real estate markets-cycles and fundamentals (No. w7566). National Bureau of Economic Research. https://doi.org/10.3386/w7566
Chaudhry, M., Maheshwari, S., & Webb, J. (2004). REITs and idiosyncratic risk. Journal of Real Estate Research, 26(2), 207-222.
Chen, J., & Peiser, R. (1999). The risk and return characteristics of REITs: 1993–1997. Real Estate Finance, 16(1), 61-68.
Chiang, K. C. H. (2010). On the comovement of REIT prices. Journal of Real Estate Research, 32(2), 187-200.
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. https://doi.org/10.1023/A:1023607412927
Cotter, J., & Stevenson, S. (2006). Multivariate modeling of daily REIT volatility. Journal of Real Estate Finance and Economics, 32(3), 305-325. https://doi.org/10.1007/s11146-006-6804-9
Eichholtz, P. M. A. (1996). Does international diversification work better for real estate than for stocks and bonds?. Financial Analyst Journal, 52, 56-62. https://doi.org/10.2469/faj.v52.n1.1967
Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50, 987-1007. https://doi.org/10.2307/1912773
Engle, R. F., Lilien, D. M., & Robins, R. P. (1987). Estimating time varying risk premia in the term structure: the Arch-M model. Econometrica, 55, 391-407. https://doi.org/10.2307/1913242
Fu, F. (2009). Idiosyncratic risk and the cross-section of expected stock returns. Journal of Financial Economics, 91, 24-37. https://doi.org/10.1016/j.jfineco.2008.02.003
Goyal, A., & Santa-Clara, P. (2003). Idiosyncratic risk matters! Journal of Finance, 58, 975-1007. https://doi.org/10.1111/1540-6261.00555
Hoesli, M., & Reka, K. (2013). Volatility spillovers, comovements and contagion in securitized real estate markets. Journal of Real Estate Finance and Economics, 47(1), 1-35. https://doi.org/10.1007/s11146-011-9346-8
Hui, E. C. M., & Wang, Z. (2014). Risk and credit change in Asian securitized real estate market. Habitat International, 43, 221-230. https://doi.org/10.1016/j.habitatint.2014.03.008
Hung, S. K., & Glascock, J. (2010). Volatilities and momentum returns in real estate investment trusts. Journal of Real Estate Finance and Economics, 41, 126-149. https://doi.org/10.1007/s11146-008-9165-8
Liow, K. H., & Addae-Dapaah, K. (2010). Idiosyncratic risk, market risk and correlation dynamics in the US real estate investment trusts. Journal of Housing Economics, 19, 205-218. https://doi.org/10.1016/j.jhe.2010.06.001
Liow, K. H., Chen, Z., & Liu, J. (2011). Multiple regimes and volatility transmission in securitized real estate markets. Journal of Real Estate Finance and Economics, 42, 295-328. https://doi.org/10.1007/s11146-009-9200-4
Liow, K. H., Ho, K. H. D., Ibrahim, M. F., & Chen, Z. (2009). Correlation and volatility dynamics in international real estate securities markets. Journal of Real Estate Finance and Economics, 39(2), 202-223. https://doi.org/10.1007/s11146-008-9108-4
Liow, K. H., & Ibrahim, M. F. (2010). Volatility decomposition and correlation in international securitized real estate markets. Journal of Real Estate Finance and Economics, 40, 221-243. https://doi.org/10.1007/s11146-008-9131-5
Martens, M., & Poon. S. (2001). Returns synchronization and daily correlation dynamics between international stock markets. Journal of Banking and Finance, 25, 1805-1827. https://doi.org/10.1016/S0378-4266(00)00159-X
Michayluk, D., Wilson, P. J., & Zurbruegg, R. (2006). Asymmetric volatility, correlation and returns dynamics between the U.S. and U.K. securitized real estate markets. Real Estate Economics, 34, 109-131. https://doi.org/10.1111/j.1540-6229.2006.00161.x
Nneji, O., Brooks, C., & Ward, C. (2013). Commercial real estate and equity market bubbles: are they contagious to REITs?. Urban Studies, 50(12), 2496-2516. https://doi.org/10.1177/0042098013477700
Ooi, J. T. L., Webb, J. R., & Wang, J. (2009). Idiosyncratic risk and REIT returns. Journal of Real Estate Finance and Economics, 38, 27-55. https://doi.org/10.1007/s11146-007-9091-1
Pagliari, J. L., Scherer, K. A., & Monopoli, R. T. (2003). Public versus private real estate equities. Journal of Portfolio Management, 29, 101-111. https://doi.org/10.3905/jpm.2003.319911
Payne, J. M., & Waters, G. A. (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
Sagalyn, L. (1990). Real estate risk and the business cycle: evidence from security markets. Journal of Real Estate Research, 5(2), 203-219.
Stevenson, S. (2002). An examination of volatility spillovers in REIT returns. Journal of Real Estate Portfolio Management, 8(3), 229-238.
Worzala, E., & Sirmans, C. F. (2003). Investing in international real estate stocks: a review of the literature. Urban Studies, 40(5-6), 1115-1149. https://doi.org/10.1080/0042098032000074344
Xu, Y., & Malkiel, B. G. (2003). Investigating the behaviour of idiosyncratic volatility. Journal of Business, 76, 613-64. https://doi.org/10.1086/377033
Bali, T. G., & Peng, L. (2006). Is there a risk–return trade-off? Evidence from high-frequency data. Journal of Applied Econometrics, 21, 1169-1198. https://doi.org/10.1002/jae.911
Bollerslev, T. (1986). Generalized autoregressive conditional heteroscedasticity. Journal of Econometrics, 31, 307-327. https://doi.org/10.1016/0304-4076(86)90063-1
Bond, S. A., Karolyi, G. A., & Sanders, A. B. (2003). International real estate returns: a multifactor, multicountry approach. Real Estate Economics, 31(3), 481-500. https://doi.org/10.1111/1540-6229.00074
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, 1-43. https://doi.org/10.1111/0022-1082.00318
Case, B., Goetzmann, W. N., & Rouwenhorst, K. G. (2000). Global real estate markets-cycles and fundamentals (No. w7566). National Bureau of Economic Research. https://doi.org/10.3386/w7566
Chaudhry, M., Maheshwari, S., & Webb, J. (2004). REITs and idiosyncratic risk. Journal of Real Estate Research, 26(2), 207-222.
Chen, J., & Peiser, R. (1999). The risk and return characteristics of REITs: 1993–1997. Real Estate Finance, 16(1), 61-68.
Chiang, K. C. H. (2010). On the comovement of REIT prices. Journal of Real Estate Research, 32(2), 187-200.
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. https://doi.org/10.1023/A:1023607412927
Cotter, J., & Stevenson, S. (2006). Multivariate modeling of daily REIT volatility. Journal of Real Estate Finance and Economics, 32(3), 305-325. https://doi.org/10.1007/s11146-006-6804-9
Eichholtz, P. M. A. (1996). Does international diversification work better for real estate than for stocks and bonds?. Financial Analyst Journal, 52, 56-62. https://doi.org/10.2469/faj.v52.n1.1967
Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50, 987-1007. https://doi.org/10.2307/1912773
Engle, R. F., Lilien, D. M., & Robins, R. P. (1987). Estimating time varying risk premia in the term structure: the Arch-M model. Econometrica, 55, 391-407. https://doi.org/10.2307/1913242
Fu, F. (2009). Idiosyncratic risk and the cross-section of expected stock returns. Journal of Financial Economics, 91, 24-37. https://doi.org/10.1016/j.jfineco.2008.02.003
Goyal, A., & Santa-Clara, P. (2003). Idiosyncratic risk matters! Journal of Finance, 58, 975-1007. https://doi.org/10.1111/1540-6261.00555
Hoesli, M., & Reka, K. (2013). Volatility spillovers, comovements and contagion in securitized real estate markets. Journal of Real Estate Finance and Economics, 47(1), 1-35. https://doi.org/10.1007/s11146-011-9346-8
Hui, E. C. M., & Wang, Z. (2014). Risk and credit change in Asian securitized real estate market. Habitat International, 43, 221-230. https://doi.org/10.1016/j.habitatint.2014.03.008
Hung, S. K., & Glascock, J. (2010). Volatilities and momentum returns in real estate investment trusts. Journal of Real Estate Finance and Economics, 41, 126-149. https://doi.org/10.1007/s11146-008-9165-8
Liow, K. H., & Addae-Dapaah, K. (2010). Idiosyncratic risk, market risk and correlation dynamics in the US real estate investment trusts. Journal of Housing Economics, 19, 205-218. https://doi.org/10.1016/j.jhe.2010.06.001
Liow, K. H., Chen, Z., & Liu, J. (2011). Multiple regimes and volatility transmission in securitized real estate markets. Journal of Real Estate Finance and Economics, 42, 295-328. https://doi.org/10.1007/s11146-009-9200-4
Liow, K. H., Ho, K. H. D., Ibrahim, M. F., & Chen, Z. (2009). Correlation and volatility dynamics in international real estate securities markets. Journal of Real Estate Finance and Economics, 39(2), 202-223. https://doi.org/10.1007/s11146-008-9108-4
Liow, K. H., & Ibrahim, M. F. (2010). Volatility decomposition and correlation in international securitized real estate markets. Journal of Real Estate Finance and Economics, 40, 221-243. https://doi.org/10.1007/s11146-008-9131-5
Martens, M., & Poon. S. (2001). Returns synchronization and daily correlation dynamics between international stock markets. Journal of Banking and Finance, 25, 1805-1827. https://doi.org/10.1016/S0378-4266(00)00159-X
Michayluk, D., Wilson, P. J., & Zurbruegg, R. (2006). Asymmetric volatility, correlation and returns dynamics between the U.S. and U.K. securitized real estate markets. Real Estate Economics, 34, 109-131. https://doi.org/10.1111/j.1540-6229.2006.00161.x
Nneji, O., Brooks, C., & Ward, C. (2013). Commercial real estate and equity market bubbles: are they contagious to REITs?. Urban Studies, 50(12), 2496-2516. https://doi.org/10.1177/0042098013477700
Ooi, J. T. L., Webb, J. R., & Wang, J. (2009). Idiosyncratic risk and REIT returns. Journal of Real Estate Finance and Economics, 38, 27-55. https://doi.org/10.1007/s11146-007-9091-1
Pagliari, J. L., Scherer, K. A., & Monopoli, R. T. (2003). Public versus private real estate equities. Journal of Portfolio Management, 29, 101-111. https://doi.org/10.3905/jpm.2003.319911
Payne, J. M., & Waters, G. A. (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
Sagalyn, L. (1990). Real estate risk and the business cycle: evidence from security markets. Journal of Real Estate Research, 5(2), 203-219.
Stevenson, S. (2002). An examination of volatility spillovers in REIT returns. Journal of Real Estate Portfolio Management, 8(3), 229-238.
Worzala, E., & Sirmans, C. F. (2003). Investing in international real estate stocks: a review of the literature. Urban Studies, 40(5-6), 1115-1149. https://doi.org/10.1080/0042098032000074344
Xu, Y., & Malkiel, B. G. (2003). Investigating the behaviour of idiosyncratic volatility. Journal of Business, 76, 613-64. https://doi.org/10.1086/377033