Does local economic uncertainty matter for risk of property companies? Evidence from US REITs
Abstract
With the growing number of publicly listed property companies worldwide, investors are increasingly interested in assessing the risks of such real estate companies in the stock market. This study aims to investigate the risk of US equity real estate investment trusts (REITs) in the local market context. Using US equity REITs data from 1997 to 2020, this study examines the impact of local economic uncertainty (LEU) on risk of REITs. To measure LEU, we first exploit textual analysis to extract geographical information from REITs’ annual financial reports (10-K filings) and construct state-level regional exposure for each firm. We then obtain LEU by incorporating the regional exposure with local market uncertainty based on locally headquartered firms. In the empirical results, we find that REITs with higher LEU are strongly and positively associated with higher future risks. This positive relationship is robust to a variety of alternative risk and LEU measures. Moreover, the effects of LEU are stronger for geographically concentrated REITs and LEU is positively priced by investors.
Keyword : risk, local market, uncertainty, real estate investment trusts (REITs)
How to Cite
Song, J. (2023). Does local economic uncertainty matter for risk of property companies? Evidence from US REITs. International Journal of Strategic Property Management, 27(2), 105–119. https://doi.org/10.3846/ijspm.2023.19092
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Artzner, P., Delbaen, F., Eber, J. M., & Heath, D. (1999). Coherent measures of risk. Mathematical Finance, 9(3), 203–228. https://doi.org/10.1111/1467-9965.00068
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Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
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Bahram, A., Arjun, C., & Kambiz, R. (2004). REIT investments and hedging against inflation. Journal of Real Estate Portfolio Management, 10(2), 97–112. https://doi.org/10.1080/10835547.2004.12089701
Basse, T. (2012). REITs and inflation in the USA: results from cointegration tests. International Journal of Economics and Business Research, 4(3), 284–296. https://doi.org/10.1504/IJEBR.2012.046822
Bennett, J. A., Sias, R. W., & Starks, L. T. (2003). Greener pastures and the impact of dynamic institutional preferences. The Review of Financial Studies, 16(4), 1203–1238. https://doi.org/10.1093/rfs/hhg040
Bernile, G., Kumar, A., & Sulaeman, J. (2015). Home away from home: geography of information and local investors. The Review of Financial Studies, 28(7), 2009–2049. https://doi.org/10.1093/rfs/hhv004
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Brandt, M. W., Brav, A., Graham, J. R., & Kumar, A. (2010). The idiosyncratic volatility puzzle: time trend or speculative episodes? The Review of Financial Studies, 23(2), 863–899. https://doi.org/10.1093/rfs/hhp087
Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57–82. https://doi.org/10.1111/j.1540-6261.1997.tb03808.x
Chaney, T., Sraer, D., & Thesmar, D. (2012). The collateral channel: how real estate shocks affect corporate investment. American Economic Review, 102(6), 2381–2409. https://doi.org/10.1257/aer.102.6.2381
Chatrath, A., & Liang, Y. (1998). REITs and inflation: a long-run perspective. Journal of Real Estate Research, 16(3), 311–326. https://doi.org/10.1080/10835547.1998.12090955
Chiang, M. C., Sing, T. F., & Tsai, I. C. (2017). Spillover risks in REITs and other asset markets. The Journal of Real Estate Finance and Economics, 54, 579–604. https://doi.org/10.1007/s11146-015-9545-9
Coval, J. D., & Moskowitz, T. J. (1999). Home bias at home: local equity preference in domestic portfolios. The Journal of Finance, 54(6), 2045–2073. https://doi.org/10.1111/0022-1082.00181
Coval, J. D., & Moskowitz, T. J. (2001). The geography of investment: informed trading and asset prices. Journal of Political Economy, 109(4), 811–841. https://doi.org/10.1086/322088
Crone, T. M., & Clayton-Matthews, A. (2005). Consistent economic indexes for the 50 states. Review of Economics and Statistics, 87(4), 593–603. https://doi.org/10.1162/003465305775098242
Dougal, C., Parsons, C. A., & Titman, S. (2015). Urban vibrancy and corporate growth. The Journal of Finance, 70(1), 163–210. https://doi.org/10.1111/jofi.12215
Ellul, A., & Yerramilli, V. (2013). Stronger risk controls, lower risk: evidence from US bank holding companies. The Journal of Finance, 68(5), 1757–1803. https://doi.org/10.1111/jofi.12057
Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: empirical tests. Journal of Political Economy, 81(3), 607–636. https://doi.org/10.1086/260061
Feng, Z., & Wu, Z. (2022). Local economy, asset location and REIT firm growth. The Journal of Real Estate Finance and Economics, 65(1), 75–102. https://doi.org/10.1007/s11146-021-09822-8
Fisher, G., Steiner, E., Titman, S., & Viswanathan, A. (2022). Location density, systematic risk, and cap rates: evidence from REITs. Real Estate Economics, 50(2), 366–400. https://doi.org/10.1111/1540-6229.12367
Gabaix, X., Laibson, D., Moloche, G., & Weinberg, S. (2006). Costly information acquisition: experimental analysis of a boundedly rational model. American Economic Review, 96(4), 1043–1068. https://doi.org/10.1257/aer.96.4.1043
García, D., & Norli, Ø. (2012). Geographic dispersion and stock returns. Journal of Financial Economics, 106(3), 547–565. https://doi.org/10.1016/j.jfineco.2012.06.007
Glascock, J. L., Lu, C., & So, R. W. (2000). Further evidence on the integration of REIT, bond, and stock returns. The Journal of Real Estate Finance and Economics, 20, 177–194. https://doi.org/10.1023/A:1007877321475
Gu, L., Hackbarth, D., & Johnson, T. (2018). Inflexibility and stock returns. The Review of Financial Studies, 31(1), 278–321. https://doi.org/10.1093/rfs/hhx092
Gulen, H., & Ion, M. (2016). Policy uncertainty and corporate investment. The Review of Financial Studies, 29(3), 523–564.
Harford, J., Klasa, S., & Maxwell, W. F. (2014). Refinancing risk and cash holdings. The Journal of Finance, 69(3), 975–1012. https://doi.org/10.1111/jofi.12133
Irvine, P. J., & Pontiff, J. (2009). Idiosyncratic return volatility, cash flows, and product market competition. The Review of Financial Studies, 22(3), 1149–1177. https://doi.org/10.1093/rfs/hhn039
Jurado, K., Ludvigson, S. C., & Ng, S. (2015). Measuring uncertainty. American Economic Review, 105(3), 1177–1216. https://doi.org/10.1257/aer.20131193
Kawaguchi, Y., Sa‐Aadu, J., & Shilling, J. D. (2017). REIT stock price volatility and the effects of leverage. Real Estate Economics, 45(2), 452–477. https://doi.org/10.1111/1540-6229.12153
Kelly, B., & Jiang, H. (2014). Tail risk and asset prices. The Review of Financial Studies, 27(10), 2841–2871. https://doi.org/10.1093/rfs/hhu039
Korniotis, G. M., & Kumar, A. (2013). State‐level business cycles and local return predictability. The Journal of Finance, 68(3), 1037–1096. https://doi.org/10.1111/jofi.12017
Lehmann, B. N. (1990). Residual risk revisited. Journal of Econometrics, 45(1–2), 71–97. https://doi.org/10.1016/0304-4076(90)90094-A
Li, L., & Zhu, B. (2022). REITs’ stock return volatility: property market risk versus equity market risk. The Journal of Real Estate Finance and Economics, 1–25. https://doi.org/10.1007/s11146-022-09901-4
Liang, B., & Park, H. (2007). Risk measures for hedge funds: a cross‐sectional approach. European Financial Management, 13(2), 333–370. https://doi.org/10.1111/j.1468-036X.2006.00357.x
Ling, D. C., & Naranjo, A. (1999). The integration of commercial real estate markets and stock markets. Real Estate Economics, 27(3), 483–515. https://doi.org/10.1111/1540-6229.00781
Ling, D. C., Naranjo, A., & Scheick, B. (2018). Geographic portfolio allocations, property selection and performance attribution in public and private real estate markets. Real Estate Economics, 46(2), 404–448. https://doi.org/10.1111/1540-6229.12184
Ling, D. C., Wang, C., & Zhou, T. (2021). The geography of real property information and investment: firm location, asset location, and institutional ownership. Real Estate Economics, 49, 287–331. https://doi.org/10.1111/1540-6229.12294
Lintner, J. (1965). Security prices, risk, and maximal gains from diversification. The Journal of Finance, 20(4), 587–615. https://doi.org/10.1111/j.1540-6261.1965.tb02930.x
Longin, F., & Solnik, B. (2001). Extreme correlation of international equity markets. The Journal of Finance, 56(2), 649–676. https://doi.org/10.1111/0022-1082.00340
Merton, R. C. (1973). An intertemporal capital asset pricing model. Econometrica: Journal of the Econometric Society, 41(5), 867–887. https://doi.org/10.2307/1913811
Merton, R. C. (1987). A simple model of capital market equilibrium with incomplete information. The Journal of Finance, 42(3), 483–510. https://doi.org/10.1111/j.1540-6261.1987.tb04565.x
Milcheva, S., Yildirim, Y., & Zhu, B. (2021). Distance to headquarter and real estate equity performance. The Journal of Real Estate Finance and Economics, 63, 327–353. https://doi.org/10.1007/s11146-020-09767-4
Newey, W. K., & West, K. D. (1987). Hypothesis testing with efficient method of moments estimation. International Economic Review, 28(3), 777–787. https://doi.org/10.2307/2526578
Park, J. Y., Mullineaux, D. J., & Chew, I. K. (1990). Are REITs inflation hedges? The Journal of Real Estate Finance and Economics, 3, 91–103. https://doi.org/10.1007/BF00153708
Parsons, C. A., Sabbatucci, R., & Titman, S. (2020). Geographic lead-lag effects. The Review of Financial Studies, 33(10), 4721–4770. https://doi.org/10.1093/rfs/hhz145
Pirinsky, C., & Wang, Q. (2006). Does corporate headquarters location matter for stock returns? The Journal of Finance, 61(4), 1991–2015. https://doi.org/10.1111/j.1540-6261.2006.00895.x
Shumway, T. (1997). The delisting bias in CRSP data. The Journal of Finance, 52(1), 327–340. https://doi.org/10.1111/j.1540-6261.1997.tb03818.x
Smajlbegovic, E. (2019). Regional economic activity and stock returns. Journal of Financial and Quantitative Analysis, 54(3), 1051–1082. https://doi.org/10.1017/S0022109018001126
Song, J., & Liow, K. H. (2022). Industrial tail exposure risk and asset price: evidence from US REITs. Real Estate Economics, 1–37. https://doi.org/10.1111/1540-6229.12402
Srivastav, A., Keasey, K., Mollah, S., & Vallascas, F. (2017). CEO turnover in large banks: does risk matter? Journal of Accounting and Economics, 64(1), 37–55. https://doi.org/10.1016/j.jacceco.2017.05.001
Sun, L., Titman, S. D., & Twite, G. J. (2015). REIT and commercial real estate returns: a postmortem of the financial crisis. Real Estate Economics, 43(1), 8–36. https://doi.org/10.1111/1540-6229.12055
Tuzel, S., & Zhang, M. B. (2017). Local risk, local factors, and asset prices. The Journal of Finance, 72(1), 325–370. https://doi.org/10.1111/jofi.12465
Xu, Y., & Malkiel, B. G. (2003). Investigating the behavior of idiosyncratic volatility. The Journal of Business, 76(4), 613–645. https://doi.org/10.1086/377033
Zhu, B., & Lizieri, C. (2022). Local beta: has local real estate market risk been priced in REIT returns? The Journal of Real Estate Finance and Economics, 1–37. https://doi.org/10.1007/s11146-022-09890-4
An, H., Wu, Q., & Wu, Z. (2016). REIT crash risk and institutional investors. The Journal of Real Estate Finance and Economics, 53(4), 527–558. https://doi.org/10.1007/s11146-015-9527-y
Ang, A., & Chen, J. (2002). Asymmetric correlations of equity portfolios. Journal of Financial Economics, 63(3), 443–494. https://doi.org/10.1016/S0304-405X(02)00068-5
Ang, A., Hodrick, R. J., Xing, Y., & Zhang, X. (2006). The cross‐section of volatility and expected returns. The Journal of Finance, 61(1), 259–299. https://doi.org/10.1111/j.1540-6261.2006.00836.x
Artzner, P., Delbaen, F., Eber, J. M., & Heath, D. (1999). Coherent measures of risk. Mathematical Finance, 9(3), 203–228. https://doi.org/10.1111/1467-9965.00068
Baik, B., Kang, J. K., & Kim, J. M. (2010). Local institutional investors, information asymmetries, and equity returns. Journal of Financial Economics, 97(1), 81–106. https://doi.org/10.1016/j.jfineco.2010.03.006
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
Baker, S. R., Davis, S. J., & Levy, J. A. (2022). State-level economic policy uncertainty (Working Paper No. 29714). National Bureau of Economic Research. https://doi.org/10.3386/w29714
Bahram, A., Arjun, C., & Kambiz, R. (2004). REIT investments and hedging against inflation. Journal of Real Estate Portfolio Management, 10(2), 97–112. https://doi.org/10.1080/10835547.2004.12089701
Basse, T. (2012). REITs and inflation in the USA: results from cointegration tests. International Journal of Economics and Business Research, 4(3), 284–296. https://doi.org/10.1504/IJEBR.2012.046822
Bennett, J. A., Sias, R. W., & Starks, L. T. (2003). Greener pastures and the impact of dynamic institutional preferences. The Review of Financial Studies, 16(4), 1203–1238. https://doi.org/10.1093/rfs/hhg040
Bernile, G., Kumar, A., & Sulaeman, J. (2015). Home away from home: geography of information and local investors. The Review of Financial Studies, 28(7), 2009–2049. https://doi.org/10.1093/rfs/hhv004
Black, F. (1976). Studies of stock price volatility changes. In Proceedings of the 1976 Meeting of the Business and Economic Statistics Section (pp. 177–181), American Statistical Association, Washington DC.
Brandt, M. W., Brav, A., Graham, J. R., & Kumar, A. (2010). The idiosyncratic volatility puzzle: time trend or speculative episodes? The Review of Financial Studies, 23(2), 863–899. https://doi.org/10.1093/rfs/hhp087
Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57–82. https://doi.org/10.1111/j.1540-6261.1997.tb03808.x
Chaney, T., Sraer, D., & Thesmar, D. (2012). The collateral channel: how real estate shocks affect corporate investment. American Economic Review, 102(6), 2381–2409. https://doi.org/10.1257/aer.102.6.2381
Chatrath, A., & Liang, Y. (1998). REITs and inflation: a long-run perspective. Journal of Real Estate Research, 16(3), 311–326. https://doi.org/10.1080/10835547.1998.12090955
Chiang, M. C., Sing, T. F., & Tsai, I. C. (2017). Spillover risks in REITs and other asset markets. The Journal of Real Estate Finance and Economics, 54, 579–604. https://doi.org/10.1007/s11146-015-9545-9
Coval, J. D., & Moskowitz, T. J. (1999). Home bias at home: local equity preference in domestic portfolios. The Journal of Finance, 54(6), 2045–2073. https://doi.org/10.1111/0022-1082.00181
Coval, J. D., & Moskowitz, T. J. (2001). The geography of investment: informed trading and asset prices. Journal of Political Economy, 109(4), 811–841. https://doi.org/10.1086/322088
Crone, T. M., & Clayton-Matthews, A. (2005). Consistent economic indexes for the 50 states. Review of Economics and Statistics, 87(4), 593–603. https://doi.org/10.1162/003465305775098242
Dougal, C., Parsons, C. A., & Titman, S. (2015). Urban vibrancy and corporate growth. The Journal of Finance, 70(1), 163–210. https://doi.org/10.1111/jofi.12215
Ellul, A., & Yerramilli, V. (2013). Stronger risk controls, lower risk: evidence from US bank holding companies. The Journal of Finance, 68(5), 1757–1803. https://doi.org/10.1111/jofi.12057
Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: empirical tests. Journal of Political Economy, 81(3), 607–636. https://doi.org/10.1086/260061
Feng, Z., & Wu, Z. (2022). Local economy, asset location and REIT firm growth. The Journal of Real Estate Finance and Economics, 65(1), 75–102. https://doi.org/10.1007/s11146-021-09822-8
Fisher, G., Steiner, E., Titman, S., & Viswanathan, A. (2022). Location density, systematic risk, and cap rates: evidence from REITs. Real Estate Economics, 50(2), 366–400. https://doi.org/10.1111/1540-6229.12367
Gabaix, X., Laibson, D., Moloche, G., & Weinberg, S. (2006). Costly information acquisition: experimental analysis of a boundedly rational model. American Economic Review, 96(4), 1043–1068. https://doi.org/10.1257/aer.96.4.1043
García, D., & Norli, Ø. (2012). Geographic dispersion and stock returns. Journal of Financial Economics, 106(3), 547–565. https://doi.org/10.1016/j.jfineco.2012.06.007
Glascock, J. L., Lu, C., & So, R. W. (2000). Further evidence on the integration of REIT, bond, and stock returns. The Journal of Real Estate Finance and Economics, 20, 177–194. https://doi.org/10.1023/A:1007877321475
Gu, L., Hackbarth, D., & Johnson, T. (2018). Inflexibility and stock returns. The Review of Financial Studies, 31(1), 278–321. https://doi.org/10.1093/rfs/hhx092
Gulen, H., & Ion, M. (2016). Policy uncertainty and corporate investment. The Review of Financial Studies, 29(3), 523–564.
Harford, J., Klasa, S., & Maxwell, W. F. (2014). Refinancing risk and cash holdings. The Journal of Finance, 69(3), 975–1012. https://doi.org/10.1111/jofi.12133
Irvine, P. J., & Pontiff, J. (2009). Idiosyncratic return volatility, cash flows, and product market competition. The Review of Financial Studies, 22(3), 1149–1177. https://doi.org/10.1093/rfs/hhn039
Jurado, K., Ludvigson, S. C., & Ng, S. (2015). Measuring uncertainty. American Economic Review, 105(3), 1177–1216. https://doi.org/10.1257/aer.20131193
Kawaguchi, Y., Sa‐Aadu, J., & Shilling, J. D. (2017). REIT stock price volatility and the effects of leverage. Real Estate Economics, 45(2), 452–477. https://doi.org/10.1111/1540-6229.12153
Kelly, B., & Jiang, H. (2014). Tail risk and asset prices. The Review of Financial Studies, 27(10), 2841–2871. https://doi.org/10.1093/rfs/hhu039
Korniotis, G. M., & Kumar, A. (2013). State‐level business cycles and local return predictability. The Journal of Finance, 68(3), 1037–1096. https://doi.org/10.1111/jofi.12017
Lehmann, B. N. (1990). Residual risk revisited. Journal of Econometrics, 45(1–2), 71–97. https://doi.org/10.1016/0304-4076(90)90094-A
Li, L., & Zhu, B. (2022). REITs’ stock return volatility: property market risk versus equity market risk. The Journal of Real Estate Finance and Economics, 1–25. https://doi.org/10.1007/s11146-022-09901-4
Liang, B., & Park, H. (2007). Risk measures for hedge funds: a cross‐sectional approach. European Financial Management, 13(2), 333–370. https://doi.org/10.1111/j.1468-036X.2006.00357.x
Ling, D. C., & Naranjo, A. (1999). The integration of commercial real estate markets and stock markets. Real Estate Economics, 27(3), 483–515. https://doi.org/10.1111/1540-6229.00781
Ling, D. C., Naranjo, A., & Scheick, B. (2018). Geographic portfolio allocations, property selection and performance attribution in public and private real estate markets. Real Estate Economics, 46(2), 404–448. https://doi.org/10.1111/1540-6229.12184
Ling, D. C., Wang, C., & Zhou, T. (2021). The geography of real property information and investment: firm location, asset location, and institutional ownership. Real Estate Economics, 49, 287–331. https://doi.org/10.1111/1540-6229.12294
Lintner, J. (1965). Security prices, risk, and maximal gains from diversification. The Journal of Finance, 20(4), 587–615. https://doi.org/10.1111/j.1540-6261.1965.tb02930.x
Longin, F., & Solnik, B. (2001). Extreme correlation of international equity markets. The Journal of Finance, 56(2), 649–676. https://doi.org/10.1111/0022-1082.00340
Merton, R. C. (1973). An intertemporal capital asset pricing model. Econometrica: Journal of the Econometric Society, 41(5), 867–887. https://doi.org/10.2307/1913811
Merton, R. C. (1987). A simple model of capital market equilibrium with incomplete information. The Journal of Finance, 42(3), 483–510. https://doi.org/10.1111/j.1540-6261.1987.tb04565.x
Milcheva, S., Yildirim, Y., & Zhu, B. (2021). Distance to headquarter and real estate equity performance. The Journal of Real Estate Finance and Economics, 63, 327–353. https://doi.org/10.1007/s11146-020-09767-4
Newey, W. K., & West, K. D. (1987). Hypothesis testing with efficient method of moments estimation. International Economic Review, 28(3), 777–787. https://doi.org/10.2307/2526578
Park, J. Y., Mullineaux, D. J., & Chew, I. K. (1990). Are REITs inflation hedges? The Journal of Real Estate Finance and Economics, 3, 91–103. https://doi.org/10.1007/BF00153708
Parsons, C. A., Sabbatucci, R., & Titman, S. (2020). Geographic lead-lag effects. The Review of Financial Studies, 33(10), 4721–4770. https://doi.org/10.1093/rfs/hhz145
Pirinsky, C., & Wang, Q. (2006). Does corporate headquarters location matter for stock returns? The Journal of Finance, 61(4), 1991–2015. https://doi.org/10.1111/j.1540-6261.2006.00895.x
Shumway, T. (1997). The delisting bias in CRSP data. The Journal of Finance, 52(1), 327–340. https://doi.org/10.1111/j.1540-6261.1997.tb03818.x
Smajlbegovic, E. (2019). Regional economic activity and stock returns. Journal of Financial and Quantitative Analysis, 54(3), 1051–1082. https://doi.org/10.1017/S0022109018001126
Song, J., & Liow, K. H. (2022). Industrial tail exposure risk and asset price: evidence from US REITs. Real Estate Economics, 1–37. https://doi.org/10.1111/1540-6229.12402
Srivastav, A., Keasey, K., Mollah, S., & Vallascas, F. (2017). CEO turnover in large banks: does risk matter? Journal of Accounting and Economics, 64(1), 37–55. https://doi.org/10.1016/j.jacceco.2017.05.001
Sun, L., Titman, S. D., & Twite, G. J. (2015). REIT and commercial real estate returns: a postmortem of the financial crisis. Real Estate Economics, 43(1), 8–36. https://doi.org/10.1111/1540-6229.12055
Tuzel, S., & Zhang, M. B. (2017). Local risk, local factors, and asset prices. The Journal of Finance, 72(1), 325–370. https://doi.org/10.1111/jofi.12465
Xu, Y., & Malkiel, B. G. (2003). Investigating the behavior of idiosyncratic volatility. The Journal of Business, 76(4), 613–645. https://doi.org/10.1086/377033
Zhu, B., & Lizieri, C. (2022). Local beta: has local real estate market risk been priced in REIT returns? The Journal of Real Estate Finance and Economics, 1–37. https://doi.org/10.1007/s11146-022-09890-4