RELATIONSHIP BETWEEN INSTITUTIONAL OWNERSHIP AND IDIOSYNCRATIC VOLATILITY IN ASIA-PACIFIC REITS

Abstract

This paper investigates the relationship between institutional ownership and idiosyncratic volatility, specifically on Real Estate Investment Trust (REIT) in Asia- Pacific from 2010 Q4 to 2013 Q3. It is tested out using two model specifications OLS regression and Type I Tobit model. The paper has also prove that using institutional ownership level as the dependent variable is better in observing the effect of idiosyncratic volatility on institutional ownership as compared to change in institutional ownership. It has also enhanced the existing literature by finding out that adjustments of institutional portfolios based on the characteristics of REITs are largely observed on the first lagged term of idiosyncratic volatility which indicates the swift responsiveness of institutional investors in adjusting their investment portfolios. The robustness of the results is also examined through granger causality test to rebuff alterative theories of the effect of institutional ownership on idiosyncratic volatility. Despite the unique characteristics of REITs, it is interesting to note that the institutional investors have the same preferences for REITs as they have for common stocks. From a REIT manager’s perspective, this indicates a decision dilemma. REIT managers can choose to outperform the market benchmark by achieving superior returns on their investment portfolio by employing focused investment strategies. However, this will deter institution investments, as the strategy is likely to contribute to higher idiosyncratic volatility.