An examination of value anomaly in REIT returns

Abstract

This thesis examines the value anomaly of Real Estate Investment Trust (REITs) returns, and finds significant value anomaly in REIT market before 1990, while no anomaly is found before 1990. The second part of this study examines two explanations of the REIT value anomaly, namely risk-based theory and mispricing theory. In particular, we find that value REIT stocks do no expose investors to higher risks. Instead, we find evidence of investorsa?? extrapolation, which property explain the value anomaly in REIT returns. Moreover, we further notice that value REIT stocks are more severely mispriced than growth REIT stocks, also there is no evidence of mispricing before 1990, when there is less valuation uncertainty.Finally, the third part of the study examines the persistence of value anomaly. In essence, we examine several measures of arbitrage cost, and find that idiosyncratic risk associated with the premium of value stocks is the main reason for the persistence of value anomaly in REIT market.