The Asymmetric Conditional Beta-Return Relations of REITs

摘要

The traditional modern portfolio model posits that return is a function of beta-the stock's sensitivity to market movements. However, much research suggests that on an empirical basis this expectation does not hold. Pettengill, Sundaram and Mathur (1995) [PSM] suggest that the problem is that expected risk-return relationships are positive, but actual outcomes can vary. Thus we implement the PSM procedure to determine if we can obtain better explanatory ability for REIT returns relative to beta. Using PSM's suggested technique, we find evidence that REIT stocks with higher betas have more positive returns when the realized market returns exceed risk-free rates and more negative returns when the realized market returns fall below risk-free rates. Furthermore, we form REIT portfolios based on betas and find that similar results hold for portfolio level: REIT portfolios with higher betas have more positive returns when the realized market returns exceed risk-free rates and more negative returns when the realized market returns fall below risk-free rates. We also examine beta relative to up and downside risk as suggested in Harlow and Rao (1989) [HR]. By using HR conditional beta approach, we find that REIT investors seem to view losses differently than gains. Our study is to determine if we can validate the positive risk-return trade-off predicted by CAPM and to show that a significant and positive systematic beta-return relation exists in both static and conditional CAPM model settings. We believe that our research effort is the first to incorporate both static beta estimation and asymmetric beta estimation to show a significantly positive risk-return trade-off in the industry of real estate investment trusts. Using HR generalized Mean-Lower Partial Moment Asset Pricing Model, we confirm that REIT stocks with higher downside betas have higher average returns, but upside betas are insignificant in the beta-return relation for REITs. We find similar results for portfolio level as well. Consistent with the findings on real estate market index returns in Cheng (2005), our results go beyond his findings to highlight the significance of downside beta risk in REIT industry during the recent global financial crisis.