DO PRICES REALLY REFLECT FUNDAMENTAL VALUES IN THE LONG RUN? AN EMPIRICAL STUDY OF REITS

Abstract

Although REIT derives its price through the measure of the asset value, many a times the price deviates quite significantly away from the fundamental asset value. Thus, the study of REIT price and NAV would help to determine if a long-run equilibrium value exists for price/NAV. The movement of price/NAV is fundamentally affected by the volatility of the REIT price as compared to the fundamental asset value. In the long-run, the price/NAV would exhibit a mean reversion trend and based on the 20 years of observation, the equity REITs of U.S tend to move towards the value of 1.062 which is closer to the ideal value of 1. In addition, the price and NAV are both non-stationary variables which tend to present a determinitic trend. Through the process of regression, it is found that the REIT price and NAV are both cointegrated with its coefficient showing a mean reversion pattern. Thus, there exists a long-term trend for the price/NAV value and this would serve as the long-term equilibrium value which the REIT price and NAV would converge to.