Idiosyncratic Risk and REIT Returns |
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| Authors: | Joseph T L Ooi Jingliang Wang James R Webb |
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| Institution: | (1) Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore, 117566, Singapore;(2) Department of Finance, Cleveland State University, Cleveland, OH 44114, USA |
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| Abstract: | The volatility of a stock returns can be decomposed into market and firm-specific volatility, with the former commonly known
as systematic risk and the later as idiosyncratic risk. This study examines the relevance of idiosyncratic risk in explaining
the monthly cross-sectional returns of REIT stocks. Contrary to the CAPM theory, a significant positive relationship is found
between idiosyncratic volatility and the cross-sectional returns. This suggests that firm-specific risk matters in REIT pricing.
The regression results further show that once idiosyncratic risk is controlled for in the asset-pricing model, the size and
book-to-market equity ratio factors ceased to be significant. The explanatory power of the momentum effect remains robust
in the presence of idiosyncratic risk.
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| Keywords: | Idiosyncratic risk Asset pricing REIT stocks |
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