SPILL-OVERS AND CO-MOVEMENTS OF SECURITIZED REAL ESTATE COMPANIES

Abstract

This study exploits new territory that was not covered by the existing studies on co-movements in asset returns and the relations with non-fundamental factors. Barberis and Shleifer (2003) and Barberis et al (2005) proposed three specific views of co-movements that reflect friction-based and sentiment-based theories: the category view, the habitat view, and the information diffusion view. They use empirical evidence that stocks added to the S&P 500 experience a significant increase in beta after the inclusion event, which is co-movements in a single category. Ambrose et al (2007) move further to study possible spill-over effects across different categories where investor sentiment and market frictions specific to one category can affect the asset returns of assets in another category, when the two categories are overlapped. They use empirical evidence that, when a few REITs were included into the S&P general market indices in 2001, other REITs that still stayed outside the indices also became more correlated with the returns of the indices, mostly due to market frictions. I, for the first time, move one step further to study possible spill-over effects to a third non-overlapping category, when two categories are overlapped. I found that when REITs were included in the general market indices of the US and Singapore in 2001 and 2005 respectively, Non-index REOCs, which is a similar but non-overlapping category, also became more correlated with the returns of the indices. As the category overlap is not a necessary condition for spill-over effects and the effect is mostly attributed to market frictions, I also study possible spill-over effect of REIT IPO. After making a comprehensive comparison of development stages and market dynamics of four major Asia Pacific markets, I found using empirical evidence in those markets and that REIT IPOs are followed by higher increases in betas of REITs than those of REOCs in developing REITs markets such as Singapore and Japan, but not in the mature REIT market such as Australia. No evidence shows that the increase in beta of REITs following REIT IPO is correlated with REIT’ sectors. In addition, with limited observations in Singapore, it seems that REIT IPOs reduce the corresponding sponsors’ systematic risk compared to other REOCs, which supports the theory and the market expectation.