Tracking the Evolution of Idiosyncratic Risk
and Cross-Sectional Expected Returns for US REITs
Nusret Cakici & Isil Erol & Dogan Tirtiroglu
Published online: 17 March 2013

Abstract

This paper adopts the methodology in Bali and Cakici (Journal of
Financial & Quantitative Analysis, 43, 29–58, 2008) in tracking the evolution
of the relation between equity REITs’ idiosyncratic risk and their cross-sectional
expected returns between 1981 and 2010. In addition to the full sample period,
we study this relation for (i) January 1981–December 1992, (ii) January 1993–
September 2001, (iii) November 2001–August 2008 and (iv) November 2001–
December 2010 and produce empirical results for (i) all sample REITs, (ii)
REITs with a price greater than $10 or (iii) REITs with a price greater than $5.
Each period represents different dynamics (including the Global Financial
Crisis) in the life of the REIT industry and leads to a different hypothesis.
Further, we present comparative results based on the Fama-French 3- and 4-
factor models. Overall, we document a negative relation between idiosyncratic
risk and cross-sectional expected returns and demonstrate that this negative
relation changes over time. These findings amplify the “idiosyncratic volatility
puzzle,” as reported in the recent finance literature. Interestingly, REITs with a
price of $5-to-$10 do well in 2009 and 2010. Further, the momentum factor
appears to be influential since the first-ever listing of a REIT in the S&P500
Index in early October 2001.