REIT Stock Price Volatility and the Effects of Leverage

Yuichiro Kawaguchi, Jarjisu Sa-Aadu, James D. Shilling

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This article sheds light on several puzzling empirical observations. We examine the volatility implications of equity Real Estate Investment Trust (REIT) stock returns over the sample period from January 1985 through October 2012. We find a negative "leverage effect" in the pre- and post-Greenspan era, but not during the Greenspan era (circa 1994-2006). We argue that the positive elasticity of variance with respect to the value of equity during the Greenspan era can be explained by a decline in the spread between the yield on commercial mortgages and 10-year Treasuries, which triggered a wealth transfer from REIT equity holders to REIT debt holders. We also argue that the declining commercial-mortgage-10-year-Treasury yield spread during the Greenspan era allowed REITs to take on far more risk than most people realized. We then document that average REIT stock return volatility increased significantly in the 2007-2010 period in the midst of a historic decline in REIT stock prices. The results have significant implications for the good deal of interest and debate in the media over the status of REITs and whether equity REITs have become excessively risky relative to the returns they generate.

Original languageEnglish
JournalReal Estate Economics
DOIs
Publication statusAccepted/In press - 2016

Fingerprint

Real estate investment trusts
Leverage
Stock price volatility
Equity
Mortgages
Leverage effect
Stock return volatility
Debt
Elasticity
Wealth transfer
Yield spread
Stock returns
Stock prices

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

REIT Stock Price Volatility and the Effects of Leverage. / Kawaguchi, Yuichiro; Sa-Aadu, Jarjisu; Shilling, James D.

In: Real Estate Economics, 2016.

Research output: Contribution to journalArticle

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