Instability and Predictability of Risk Loadings for Equity REITs

摘要

This study analyses the risk loadings of equity REITs and how they vary over time by using the Flexible Least Squares (FLS) method. This study provides evidence that the FLS method is able to produce more accurate and stable forecasts of costs of equity than rolling regressions, in terms of the smaller standard deviation of forecasting errors. The better forecasts are the result of better estimates of factor risk loadings. This study finds that some property related variables, in addition to the risk-free rate, play significant roles in explaining risk loadings. A higher appraised value for properties may cause a decline in the sensitivity of equity REIT stocks to changes in the stock market, while an increase in the number of commercial properties owned by a REIT may lead to a lower sensitivity for changes in small stock returns. Net operating income generated by properties has a significant impact on the risk loadings of book-to-market and maturity factors. The results also suggest that an increase in overall income returns from properties may result in a higher sensitivity for REITs with higher book-to-market value ratios and may reduce the maturity risk for equity REIT stocks.