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The Journal of Real Estate Finance and Economics

Erschienen in:

04.10.2017

On the Earnings and Price Momentum Strategies: Evidence from European Real Estate Firms

verfasst von: Jochem J. Bron, Chinmoy Ghosh, Milena T. Petrova

Erschienen in: The Journal of Real Estate Finance and Economics | Ausgabe 3/2018

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Abstract

We test the performance and interaction between earnings and price momentum for European real estate companies by first making use of decile portfolios sorted on the previous 3- to 12-month returns, standardized unexpected earnings and a combination of both. Then, the relation is tested on a risk-adjusted basis employing a 3-factor asset pricing model and Fama and Macbeth (1973) cross-sectional regression analyses. Our analyses reveal several critical findings: (1) both price and earnings momentum are effective for European firms, the effect being stronger for the UK than EU firms; (2) unlike U.S. REITs, price momentum seems to dominate drift for European firms; (3) there is weak evidence for positive interaction between drift and price momentum, contrary to the U.S. evidence; (4) the performance of momentum strategies depends on the state of the economy, while controlling for systematic factors; (5) idiosyncratic risk of real estate property firms may influence the returns on drift and momentum factors.

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Momentum effect indicates that future performance can be predicted based on lagged returns (Jegadeesh and Titman 1993, and Jegadeesh 2001). Earnings momentum indicates that good-news firms - stocks with positive unexpected earnings announcements - have the tendency to continue to drift up, while bad-news firms - stocks with negative unexpected earnings announcements - have the tendency to continue to drift down (Feng et al. 2014).

Consistent with this evidence, several authors (Graffiti and Young 1997, Stevenson 2002, Chui et al. 2003a, 2003b, Hung and Glascock 2008, 2010, Derwall et al. 2009, Goebel et al. 2012, and FPS) reported significant price momentum in REITs. Similarly, PGS provide significant evidence for earnings momentum in REITs, reflecting the earnings growth induced by the serial correlation in commercial real estate rental growth. FPS (2014) find that when controlling for drift, momentum generates negative returns, but the converse is not true, which is inconsistent with the evidence on the broader market.

It is important to note that there is substantive evidence that the performance and risk of REITs vary by property type. Thus, we do not imply that the REIT sector is homogeneous across property types; we only refer to the fact that REITs are subject to a consistent set of regulations.

Henceforth, to minimize repetition, we identify the sample of European property firms excluding UK firms as simply “EU” firms. These firms are drawn from 5 Western European countries.

Rouwenhorst (1998) shows that momentum strategies are profitable in Europe. Similarly, Griffin et al. (2003) and Chui et al. (2010) present evidence that, although with some exceptions in Asia, momentum strategies are profitable in most large markets. Jegadeesh and Titman (1993, 2011) show that there are two situations in which momentum strategies do not generate positive profits. The first is a form of seasonality - in the month of January momentum strategies earn negative returns, while in all other months returns from this strategy are positive. The second is the performance of momentum strategies around an economic downturn. The reason for the negative returns during a financial downturn is because betas tend to be low for winning stocks and high for losing stocks after a crisis period. Thus, when the market recovers shortly after a crisis, losing stocks tend to outperform winning stocks, because of their higher betas.

Others find similar results over different sample periods. For example, Givoly and Lakonishok (1979) find a 5% difference between the Up and Down revision portfolio over the period 1967-1974, which is in line with the results of Stickel (1991) for the period 1981-1984.

See Derwall et al. (2009), Hung and Glascock (2008), and Goebel et al. (2012). Hung and Glascock (2008) find that momentum returns are higher when the market is up, and Goebel et al. (2012) report that price momentum strategy resulted in positive returns for REITs from 1993 to 2009.

FPS control for specific property types, but their results remain unchanged. As we noted, we cannot control for property type in our analyses because of lack of detailed data.

As a robustness check, these returns are also calculated by skipping one month between portfolio formation and the holding period. This is done to control for the bid-ask bounce which can have a downward effect on the returns when they are measured over adjacent months (Chan et al. 1996), and thereby affect the returns of the earnings and price momentum strategies.

www.bf.uzh.ch/go/risk-factors . In a previous version of this paper we analyzed European property firms, based on returns and accounting data in USD and using monthly European Fama and French (1993) factors from Kenneth R. French’s Data Library http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html . The results were similar to our current results, but we could not distinguish to what extent the returns were influenced by changes in exchange rates.

Two caveats are in order in the interpretation of these and subsequent results. First, the EU sample contains property firms from five different countries where the REIT regime started at different points in time during the sample period. In addition, the regulatory provisions of REITs (i.e., dividend distribution, leverage restrictions, investment portfolio) differ across these countries. However, controlling for country effects would result in loss of degrees of freedom. Second, as reported in studies of U.S. REITs, the risk and performance of REITs depend on property type. Unfortunately, we cannot control for this factor because of absence of detailed data. As such, our results and inferences must be interpreted with caution.

We acknowledge that, due to the small sample size of UK property firms, decile portfolios are subject to idiosyncratic risk, and statistical tests based on the returns of these portfolios have limited power. To address this problem, we examined the performance of portfolios formed on quintiles and quartiles of returns. In unreported results, we find that the overall findings remain unaltered. However, the reported statistical significance for the tests with the UK sample must be viewed with caution.

Indeed, in several cases, the higher ranked portfolios (i.e., 9th and High) earn lower returns than Lower ranked MOM portfolios.

As previously noted, the reason for separating the UK sample from others is that the UK has a different currency, and its market is closely linked with the U.S. However, one could argue that REITs and property companies in the EU sample are also listed in different stock markets, with different regulatory provisions and characteristics being influenced by local policies. The only other country with a reasonable sample size is France, with 36 companies. For robustness, we carried out similar tests with the sample of French companies. The results are consistent with the overall findings for the aggregate EU sample, but lack statistical power, due to the small sample size. We do not report the results, for the sake of brevity.

In the interest of space, we do not report the results for k = 6 and k = 12. These results are similar and available from the authors on request.

This pattern does not match the one based on deciles of MOM portfolios, which indicates that, despite the low returns from High decile portfolio, the cumulative returns from Higher ranked portfolios dominates that from lower ranked portfolios.

It may be recalled that we identify the financial crisis period in Europe as 2008–2012. The other years in our dataset are considered normal period.

We do not report these results, for the sake of brevity, but they are available upon request.

Results are not reported, for the sake of brevity, but are available upon request. We focus on the crisis period for two reasons. First, analyses of the returns during the crisis period allow us to examine the impact of idiosyncratic risk on momentum returns, and, second, as our previous analyses reveal, returns on HML portfolios are generally higher during the crisis period.

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Titel: On the Earnings and Price Momentum Strategies: Evidence from European Real Estate Firms
verfasst von: Jochem J. Bron
Chinmoy Ghosh
Milena T. Petrova
Publikationsdatum: 04.10.2017
Verlag: Springer US
Erschienen in: The Journal of Real Estate Finance and Economics / Ausgabe 3/2018
Print ISSN: 0895-5638
Elektronische ISSN: 1573-045X
DOI: https://doi.org/10.1007/s11146-017-9633-0

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