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Abstract
Previous research on the returns to real estate investment trusts (REITs) has considered whether REITs are systematically exposed to general stock-market risk and interest-rate risk. This study examines how the sensitivity of REIT returns to these factors may be influenced by various REIT characteristics. Using a sample of publicly traded REITs, we estimate the sensitivity of REIT returns to stock market and interest-rate changes. We then propose and implement a model for testing whether differences in asset structure, financial leverage, management strategy, and degree of specialization in the REIT portfolios are related to their sensitivity to interest rate and market risk. Our results permit us to offer some inferences about how REITs can alter their risk exposure by managing these characteristics.
Key Words: real estate investment trusts, return sensitivity
(ProQuest Information and Learning: ... denotes formula omitted.)
1. Introduction
Previous research on the returns to real estate investment trusts (REITs) considers whether REITs are systematically exposed to interest-rate risk in addition to general stock market risk. The evidence presented by these studies is mixed, and the most recent of these studies relies on a data series that ends in 1993. The objective of this study is to further examine this issue by considering whether a more current sample of REIT returns is sensitive to stock-market and interest-rate changes and how the sensitivity of REIT returns to these two factors may vary across REITs.
We begin by estimating a two-factor model of REIT returns with changes in interest rates and the stock market as independent variables. The model provides statistically significant measures of the sensitivity of REIT stocks to these two factors, which we then test to determine whether certain characteristics of REITs are related to their sensitivity to interest rate and market risk. The characteristics considered are asset structure, financial leverage, management strategy, and degree of specialization in the REIT portfolios. The results permit us to draw some inferences about how REITs can alter their risk exposure by managing these characteristics. Our results suggest that financial leverage and management strategy warrant the scrutiny of REIT managers in the analysis of their REITs' stock market risk exposure, but we find no evidence that interest-rate risk exposure is affected by the asset structure, financial leverage,...