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REIT modified duration and convexity

Author

Listed:
  • Pierpaolo Pattitoni
  • Barbara Petracci
  • Massimo Spisni
Abstract
Listed Real Estate Investment Trusts (REITs) share several characteristics with bonds. Modified duration and convexity – interest rate risk measures generally applied in bond analyses – could therefore be natural candidates to measure the REIT price sensitivity to interest rate changes. In this paper, we propose a theoretical model that relates the REIT price changes to interest rate fluctuations. Then, we test this model empirically using data from all the 22 Italian listed REITs in the time period 2007–09. Our results show that the relationship between REIT price changes and interest rate variations is, indeed, nonlinear and significant even after market price fluctuations are taken into account. Estimates of modified duration and convexity based on historical data are provided for our sample of REITs.

Suggested Citation

  • Pierpaolo Pattitoni & Barbara Petracci & Massimo Spisni, 2012. "REIT modified duration and convexity," Economics and Business Letters, Oviedo University Press, vol. 1(3), pages 1-7.
  • Handle: RePEc:ove:journl:aid:9522
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    File URL: https://reunido.uniovi.es/index.php/EBL/article/view/9522
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    References listed on IDEAS

    as
    1. Jinliang Li & Liang Lei, 2011. "Determinants and information of REIT pricing," Applied Economics Letters, Taylor & Francis Journals, vol. 18(15), pages 1501-1505.
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    5. Donald Smith, 2010. "Bond portfolio duration, cash flow dispersion and convexity," Applied Economics Letters, Taylor & Francis Journals, vol. 17(17), pages 1669-1672.
    6. Swanson, Zane & Theis, John & Casey, K Michael, 2002. "REIT Risk Premium Sensitivity and Interest Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 24(3), pages 319-330, May.
    7. Pierpaolo Pattitoni & Barbara Petracci & Massimo Spisni, 2013. "NAV discount in REITs: the role of expert assessors," Applied Economics Letters, Taylor & Francis Journals, vol. 20(2), pages 194-198, February.
    8. Allen, Marcus T & Madura, Jeff & Springer, Thomas M, 2000. "REIT Characteristics and the Sensitivity of REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 21(2), pages 141-152, September.
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