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The Predictability of Returns on Equity REITs and their Co-movement with Other Assets

In: Asset Pricing

Author

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  • CROCKER H. LIU

    (New York University, Stern School of Business, Department of Finance, 900 Tisch Hall, New York, NY 10003, USA)

  • JIANPING J. P. MEI

    (New York University, Stern School of Business, Department of Finance, 900 Tisch Hall, New York, NY 10003, USA)

Abstract
Recent evidence suggests that the variation in the expected excess returns is predictable and arises from changes in business conditions. Using a multi-factor, latent-variable model with time-varying risk premiums, we decompose excess returns into expected and unexpected excess returns to examine what determines movements in expected excess asset returns and to what extent asset returns move together. We find that expected excess returns for Equity Real Estate Investment Trusts (EREITs) are more predictable than all other assets examined, owing in part to cap rates which contain useful information about the general risk condition in the economy. We also find that the conditional risk premiums (expected excess returns) on EREITs move very closely with those of small cap stocks and much less with those of bonds.

Suggested Citation

  • Crocker H. Liu & Jianping J. P. Mei, 2003. "The Predictability of Returns on Equity REITs and their Co-movement with Other Assets," World Scientific Book Chapters, in: Jianping Mei & Hsien-Hsing Liao (ed.), Asset Pricing, chapter 2, pages 21-45, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812795618_0002
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