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Idiosyncratic risk, market risk and correlation dynamics in the US real estate investment trusts

Addae-Dapaah, K; (2010) Idiosyncratic risk, market risk and correlation dynamics in the US real estate investment trusts. Journal of Housing Economics , 19 (3) pp. 205-218. 10.1016/j.jhe.2010.06.001. Green open access

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Abstract

This study examines total, market and idiosyncratic risk and correlation dynamics using weekly return data on two US REIT firm samples from 1988 to 2008. We find that both market and idiosyncratic variance are time-varying and that idiosyncratic variance represents a dominant component of a REIT firm’s total variance. We find a decline in idiosyncratic risk as well as a rise in average REIT correlation during the new REIT era, from 1993 to 2008. This recent downward trend of idiosyncratic risk among REITs is different to the stylized upward trend of idiosyncratic risk among stocks. There is bi-lateral Granger causality between the market and idiosyncratic risks. Finally, we detect a positive relationship between the idiosyncratic risk and expected returns, implying that the risk premium of REITs is positively related to the idiosyncratic risk during the period new REIT era, 1993–2008. Our results have important asset-pricing implications for under-diversified investors.

Type: Article
Title: Idiosyncratic risk, market risk and correlation dynamics in the US real estate investment trusts
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.jhe.2010.06.001
Publisher version: http://doi.org/10.1016/j.jhe.2010.06.001
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Idiosyncratic risk, Market risk, Correlations, Real estate investment trusts, Time trends, Expected returns
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of the Built Environment
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of the Built Environment > The Bartlett School of Planning
URI: https://discovery.ucl.ac.uk/id/eprint/1503301
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