Spillovers of Non-Fundamental Risks: The Tale of Two Securitized Real Estate Markets

Abstract

Ambrose et al. (2007) find significant evidence of information spillover effects between index real estate investment trusts (REITs) and non-index REITs in the US markets using the inclusion of REITs into the S&P general market indices in an event study. This study, however, examines the effects of REIT index inclusion events by using non-index real estate operating company (REOC) returns in the US and Singapore. The study finds that REOC returns are more correlated with the general market index returns after REIT index inclusion events, but the spillover effects are smaller for REOCs in Singapore. The spillover effects of the REIT inclusion events are larger on non-index REITs than non-index REOCs in the US. When examining REIT inclusion events in Singapore, we find evidence of increases in betas only in the REIT market, but the changes in REOC betas are insignificant. However, we find that the REIT index inclusions significantly reduce the systematic risks of REOCs that sponsor the index REITs.

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