Article2006

The Conditional CAPM and Time Varying Risk Premium for Equity REITs

20 citations0/0 files storedJournal of Real Estate Portfolio Management

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Risk and Volatility Modeling

Abstract

Executive Summary.Given the recent interest in Real Estate Investment Trusts (REITs), this study investigates whether REITs provide investors with a superior risk-return trade off. Utilizing a conditional CAPM, the findings reveal that equity REITs have outperformed the stock market with an average abnormal annual return of 2.25% with a low time-varying beta of around .24 during the June 1995 to December 2003 period. Utilizing time-varying risk premium models for equity REITs with GARCH specifications, the findings reveal that both the ARCH and GARCH effects are significant in the estimated models. In addition, the volatility shocks are quite persistent. The results show that the market returns and the first-order autocorrelation help explain the excess returns of equity REITs. However, the movement of interest rates contributes to equity REIT returns only when the market return is not present in the models.

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1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1968THE PERFORMANCE OF MUTUAL FUNDS IN THE PERIOD 1945–1964 1992ARCH modeling in finance

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