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Abstract
We examine the amount of the comovement among real estate investment trusts (REITs) around the world by estimating implied (risk-adjusted) comovements using a factor model approach. Our investigation uses a sample of individual REITs from 21 developed economies from 1990 to 2015 to examine whether cross-border comovements are observable. Our findings provide evidence of comovements after controlling for common risk factors and relevant firm characteristics. Furthermore, we show that the comovements increase over time and are more common for larger and more liquid REITs. The results indicate that country-level factors such as the local market conditions, financial development, domestic exchange rates, credit constraints, and governance significantly affect the amount of comovements.
Acknowledgments
We greatly appreciate Andrew Naranjo for his valuable comments. This research project was supported by a grant from the Research Center of the College of Business Administration, Deanship of Scientific Research, King Saud University.
Notes
1 It should be noted that the terms integration and comovement are both used in this line of research and are generally referring to assets’ correlation or association with another asset.
2 In addition to research on REITs and index inclusion, Harden et al. (2020) find that with the increase in the number of exchange traded funds (ETFs) available to investors, the volatilities of REITs are not materially impacted as a result of these fund launches and REITs being included.
3 This portfolio is defined as the equally-weighted average return of all individual REITs in our sample of 21 countries. All firms are listed in the EPRA/NAREIT Developed index. Refer to the Data section for a further discussion.
4 A similar approach that estimates comovements in stock returns is taken by Bekaert et al. (Citation2009), Green and Hwang (Citation2009), and Pirinsky and Wang (Citation2006).
5 Basa and Pavlov (2013) develop a theoretical model and examine comovements of stock returns.
6 EPRA/NAREIT Developed Index includes REITs and Real Estate Holding and Development companies. The index is composed of real estate firms including REIT constituents that trade on several global exchanges and these firms are selected by the committee from different regions.
7 According to the Global Compustat manual, total returns are computed from the adjusted prices that are equal to raw prices (PRCCD) multiplied by the daily dividend factor (TRFD) and divided by the daily adjusted factor (AJEXDI).
8 The number of REITs is 251 in 2007 but 250 in 2008.
9 The mean of the global REIT portfolio is based in the equally weighted average returns of the global portfolio over the 26-year time periods.
10 This approach is also adopted by Amihud et al. (2015) who examine liquidity premiums around the world.
11 The definitions and construction of these factors are detailed in Fama and French (Citation2015, Citation2017).
12 We also estimate the model without orthogonalizing these factors and find that the results are basically the same.
13 Bond and Xue (2017) show that both investment and profitability variables have predictive power of the future returns of the U.S. REITs based on the investment-based asset pricing framework.
14 Malmendier and Tate (2005) argue that the use of the logarithm approach to avoid outliers is superior to other methods as it achieves the purpose without discarding information contained in the data.
15 As a robustness check, we repeat the analysis based on a sample without winsorization and another sample at the different levels of winsorization and find that the results are basically the same.
16 Even if the loading on overall market and other risk factors betas increases over time, it will not impact the loading on these betas since they are controlled when estimating Equation (1).
17 The data are collected from the International Financial Statistics (IFS) of the International Monetary Fund (IMF).
18 For complete definitions, see the website worldbank.org.
19 We estimated all models with DY winsorized within and across countries. The results are qualitatively the same for both cases.
20 One exception is the estimation with all country and firm-level variables in which the p-value is slightly more than 1% (1.1%).