Time Varying Risk in U.S. Housing Sector and Real Estate Investment\n Trusts Equity Return Article Swipe
YOU?
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· 2021
· Open Access
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· DOI: https://doi.org/10.48550/arxiv.2107.10455
· OA: W4287070070
This study examines how housing sector volatilities affect real estate\ninvestment trust (REIT) equity return in the United States. I argue that\nunexpected changes in housing variables can be a source of aggregate housing\nrisk, and the first principal component extracted from the volatilities of U.S.\nhousing variables can predict the expected REIT equity returns. I propose and\nconstruct a factor-based housing risk index as an additional factor in asset\nprice models that uses the time-varying conditional volatility of housing\nvariables within the U.S. housing sector. The findings show that the proposed\nhousing risk index is economically and theoretically consistent with the\nrisk-return relationship of the conditional Intertemporal Capital Asset Pricing\nModel (ICAPM) of Merton (1973), which predicts an average maximum of 5.6\npercent of risk premium in REIT equity return. In subsample analyses, the\npositive relationship is not affected by sample periods' choice but shows\nhigher housing risk beta values for the 2009-18 sample period. The relationship\nremains significant after controlling for VIX, Fama-French three factors, and a\nbroad set of macroeconomic and financial variables. Moreover, the proposed\nhousing beta also accurately forecasts U.S. macroeconomic and financial\nconditions.\n
