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Financial Markets and Portfolio Management
Published in: Financial Markets and Portfolio Management 3/2018

21-07-2018

Changes in sentiment on REIT industry excess returns and volatility

Authors: Daniel Huerta-Sanchez, Diego Escobari

Published in: Financial Markets and Portfolio Management | Issue 3/2018

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Abstract

REIT characteristics pose unique risks and benefits to investors who seek liquid diversification and hedging vehicles to complement their portfolios. This paper tests for the asymmetric effect of individual and institutional investor sentiment on REIT industry returns and conditional volatility. We simultaneously model the impact of two markedly different groups of investors on the return generating process of the REIT industry. Our findings suggest that noise trading imposes significant systemic risk on the realization of REIT industry returns. Interestingly, corrections in institutional investor expectations have a larger effect on REIT industry returns and volatility than changes in individual investor expectations. More specifically, bearish shifts in institutional investor expectations of future market conditions have a significantly larger impact on returns and volatility than bullish shifts. Results align with the overreaction to negative information and loss aversion hypotheses.
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Appendix
Available only for authorised users
Footnotes
2
Institutions that invest in REITs include bank trusts, insurance companies, mutual funds/investment advisers, and others (Devos et al. 2012). The group with the largest REIT holdings is mutual funds/investment advisers (38% of ownership on average).
 
4
An advantage of utilizing the II and AAII as our proxies for sentiment is the weekly frequency which suits our methodology, whereas many other sentiment proxies are collected in either monthly or quarterly frequency.
 
5
All analyses were also performed using levels of investor sentiment. Results using levels rather than changes in sentiment yield qualitatively similar results to the ones reported. For the sake of brevity, we omit these results but they are available upon request.
 
6
Because some of the correlations appear to be relatively large, for example, the pair-wise correlation between Def and Prem (0.382), we additionally run various OLS regressions, similar to the specifications we will use in the empirical section (e.g., Eq. 1), to calculate the Variance Inflation Factors (VIF). We found no evidence that multicollinearity could be a concern as all VIF were below 10.
 
7
At a 10% level we fail to reject homoscedasticity only in Model 2 (Table 5).
 
8
The negative and statistically significant point estimate on \( \varepsilon_{t - 1}^{{}} /\sqrt {h_{t - 1} } \) is consistent with previous findings (Lee et al. 1992); negative shocks cause higher upward revisions in volatility than positive shocks.
 
9
Alternative specification using excess NAREIT total returns provided qualitatively the same results.
 
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Metadata
Title
Changes in sentiment on REIT industry excess returns and volatility
Authors
Daniel Huerta-Sanchez
Diego Escobari
Publication date
21-07-2018
Publisher
Springer US
Published in
Financial Markets and Portfolio Management / Issue 3/2018
Print ISSN: 1934-4554
Electronic ISSN: 2373-8529
DOI
https://doi.org/10.1007/s11408-018-0312-9

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