Top

The Journal of Real Estate Finance and Economics

Published in:

01-07-2008

Momentum Profitability and Market Trend: Evidence from REITs

Authors: Szu-Yin Kathy Hung, John L. Glascock

Published in: The Journal of Real Estate Finance and Economics | Issue 1/2008

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

This study investigates Real Estate Investment Trusts’ momentum returns in different market states, and explains the momentum phenomenon with a risk-based dividend growth theory of Johnson (Journal of Finance 57:585–608, 2002). Our results show that momentum returns of REITs are higher during up markets. This study finds that winners’ dividend/price ratios are higher than those of losers, and momentum returns are positively correlated with the difference between winners’ and losers’ dividend/price ratios. We also find that momentum returns are higher after the legislation change of REITs in 1992, and that dividend/price ratios of REITs are also higher after 1992, suggesting that a persistent shock to REIT’s dividend/price ratios in 1992 partly explains REITs’ higher momentum returns after 1992. In sum, results of this study suggest that momentum returns of REITs can be jointly explained by a time-varying factor (market state) and a cross-sectional variance in dividend yields.

previous article Residential Investment and Business Cycles in an Open Economy: A Generalized Impulse Response Approach

next article House Prices and Bubbles in New Zealand

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

Jegadeesh and Titman (1993) defines momentum strategy as shorting stocks with the lowest average returns over a 3–12 month period, using the profits from short-sells to buy stocks with the highest average returns over a 3–12 month period, and holding this zero-cost portfolio for 6–12 months.

See Jegadeesh and Titman (1993, 2001, 2002).

Fama (1991) defines a market as weakly efficient if all past price information has been reflected in current stock prices, the market is semi-strong efficient if all public information has been reflected in current stock prices, and it is strongly efficient if all inside and public information has been reflected in current stock prices.

Johnson provides a pricing model where dividend changes signal additional dividend changes in the intermediate but not long-run. His purpose is to show in a theory model that momentum could be the result of intermediate serial correlations in dividend changes which are not forecastable in the short run and which do not persist in the long-run. His model has two key features: one the market is rational in its reaction and thus momentum is associated with a (previously) unobserved risk and these effects do not last—thus, this theory model provides expected outcomes consistent with empirical observations in the momentum literature.

Cochrane sees value stocks as a special case of this class of stocks: those that provide ‘safety’ during economically turbulent times. REITs in the Johnson world would also provide such safety—as such they would experience momentum to the extent that their increased dividends have serial correlation in the intermediate but not long-run. The REITs provide safety in two ways: first, the dividend increases show strength in bad times and these dividends allow investors to disinvest (asset reallocate) without selling and facing immediate price effects.

If the market views stocks that are safer during economic hardship times as ‘better’ stocks and thus bids down their returns, we would expect that REITs might fit into this category.

In 1992, the ‘UPREIT’, or Umbrella Partnership REIT, was developed as a vehicle to enable property owners to defer recognition of taxable capital gains on properties contributed to REITs in exchange for partnership units. UPREITs have accounted for nearly two-thirds of all newly formed REITs since 1992. Up to today, over half of the largest REITs are organized as UPREITs.

Jegadeesh and Titman (1993) use overlapping samples and cumulative average returns (CAR) to measure momentum returns. Because cumulative average returns are known to cause an upward bias, this study does not measure momentum returns in terms of CAR.

The convention of momentum studies is to use a 10% breakpoint. However, due to the smaller size of the REIT sample, this study chooses 30% as breakpoint for winners and losers.

Since momentum returns require zero cost, the computation of momentum return may not be meaningful. This study defines momentum returns as investing one dollar in the winner portfolio and shorting one dollar in the loser portfolio.

Cochrane (1999) argues in a similar manner that unobserved risks may be responsible to momentum returns. In particular, Cochrane argues, “Momentum returns have also not been linked to business or financial cycles in even the informal way that I suggested for price based strategies.” However, Johnston provides such a link from dividend growth to business cycles and momentum returns (particularly) in defensive stocks.

Ambrose, B., & Linneman, P. D. (2001). Organization and REIT operating characteristics. Journal of Real Estate Finance and Economics, 21, 141–162.

Chan, K.C., Hendershott, P., & Sanders, A. (1990). Risk and return on REITs: Evidence from equity REITs. The Journal of American Real Estate and Urban Economics Association, 18, 431–452.CrossRef

Chow, G. C. (1960). Test of equality between subsets of coefficients in two linear regression models. Econometrica, 28, 591–605.CrossRef

Chui, A. C. W., Titman, S., & Wei, K. C. J. (2003). Intra-industry momentum: The case of REITs. Journal of Financial Markets, 6, 363–387.CrossRef

Cochrane, J. H. (1996). A cross-sectional test of an investment based asset model pricing model. Journal of Political Economy, 104, 572–621.CrossRef

Cochrane, J. H. (1999). New facts in finance. Working paper no. 490, The Center for Research in Security Prices, University of Chicago, Chicago, June.

Conover, C. M., Friday, H. S., & Howton, S. W. (2000). An analysis of the cross section of returns for REITs using a varying-risk beta model. Real Estate Economics, 28, 141–163.CrossRef

Cooper, M., Gutierrez, R. C., & Hameed, A. (2004). Market states and momentum. Journal of Finance, 59, 1345–1365.CrossRef

Cumby, R., & Glen, J. (1990). Evaluating the performance of international mutual funds. Journal of Finance, 45, 197–521.CrossRef

Fabozzi, F. J., & Francis, J. C.(1977). Stability tests for alphas and betas over bull and bear market conditions. Journal of Finance, 32, 1093–1099.CrossRef

Fama, E. F. (1991). Efficient capital markets: II. The Journal of Finance, 46, 1575–1617.CrossRef

Fama, E. F., & French, K. R. (1996). Multifactor explanations of asset pricing anomalies. Journal of Finance, 50, 131–155.CrossRef

Glascock, J. L. (1991). Market conditions, risk, and real estate portfolio returns: Some empirical evidence. Journal of Real Estate Finance and Economics, 4, 367–373.CrossRef

Glascock, J. L. (2002). REIT returns and inflation: Perverse or reverse causality effects? Journal of Real Estate Finance and Economics, 24, 301–317.CrossRef

Glascock, J. L. (2007). Securitized real estate: American REIT experience, history, lessons, and recommendations. Working paper, Cambridge University, Cambridge.

Glascock, J. L., & Hughes, W. T. (1995). NAREIT identified exchange listed REITs and their performance characteristics, 1972–1990. Journal of Real Estate Literature, 3, 63–83.

Glascock, J. L., Michayluk, D., & Neuhauser, K. (2004). The riskiness of REITs surrounding the October 1997 stock market decline. Journal of Real Estate Finance and Economics, 28(4), 339–354.CrossRef

Glascock, J. L., So, R. W., & Lu, C. (2007). Excess return and risk characteristics of Asian exchange-listed real estate. Working paper, Cambridge University, Cambridge.

Henriksson, R. D., & Merton, R. C. (1981). On market timing and investment performance: Statistical procedures for evaluating forecasting skill. Journal of Business, 54, 513–533.CrossRef

Howe, J. S., & Shilling, J. D. (1990). REIT advisor performance. Journal of the American Real Estate and Urban Economics Association, 18, 479–500.CrossRef

Jagannathan, R., & Wang, Z. (1996) The conditional CAPM and the cross-section of expected returns. Journal of Finance, 51, 3–53.CrossRef

Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and selling losers: Implications for stocks market efficiency. Journal of Finance, 48, 65–91.CrossRef

Jegadeesh, N., & Titman, S. (2001). Profitability of momentum strategies: An evaluation of alternative explanations. Journal of Finance, 56, 699–720.CrossRef

Jegadeesh, N., & Titman, S. (2002). Cross-sectional and time-series determinants of momentum returns. Review of Financial Studies, 15, 143–157.

Johnson, T. C. (2002). Rational momentum effects. Journal of Finance, 57, 585–608.CrossRef

Merton, R. C. (1971a). Optimal consumption and portfolio rules in a continuous time case. Review of Economics and Statistics, 51, 247–257.CrossRef

Merton, R. C. (1971b). An intertemporal capital asset pricing model. Journal of Economic Theory, 41, 867–887.

Merton, R. C. (1981). On market timing and investment performance, I. An equilibrium theory of value for market forecasts. Journal of Business, 54, 363–406.CrossRef

Title: Momentum Profitability and Market Trend: Evidence from REITs
Authors: Szu-Yin Kathy Hung
John L. Glascock
Publication date: 01-07-2008
Publisher: Springer US
Published in: The Journal of Real Estate Finance and Economics / Issue 1/2008
Print ISSN: 0895-5638
Electronic ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-007-9056-4

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 1/2008

Home Equity, Household Savings and Consumption

House Prices and Bubbles in New Zealand

Residential Investment and Business Cycles in an Open Economy: A Generalized Impulse Response Approach

Partial Interests in Recreational Property