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Does Inflation Illusion Explain the Relation between REITs and Inflation?

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  • Gwangheon Hong
  • Bong Lee

Abstract

We examine whether the observed negative relations between real estate investment trust (REIT) returns and inflation can be explained by the inflation illusion. We identify the mispricing component in REIT prices based on present value models, both linear and loglinear, and then we investigate whether inflation can explain the mispricing component. When we allow for time-varying interest rates, inflation no longer explains the REIT mispricing component. Instead, we find that behavioral factors such as consumer sentiments contribute to the mispricing of REIT prices. Copyright Springer Science+Business Media, LLC 2013

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  • Gwangheon Hong & Bong Lee, 2013. "Does Inflation Illusion Explain the Relation between REITs and Inflation?," The Journal of Real Estate Finance and Economics, Springer, vol. 47(1), pages 123-151, July.
    • Handle: RePEc:kap:jrefec:v:47:y:2013:i:1:p:123-151
    DOI: 10.1007/s11146-011-9353-9
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    2. Marfatia, Hardik A. & Gupta, Rangan & Cakan, Esin, 2017. "The international REIT’s time-varying response to the U.S. monetary policy and macroeconomic surprises," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 640-653.
    3. Chyi Lin Lee & Simon Stevenson & Ming‐Long Lee, 2018. "Low‐frequency volatility of real estate securities and macroeconomic risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 311-342, November.
    4. Pierdzioch, Christian & Risse, Marian & Gupta, Rangan & Nyakabawo, Wendy, 2019. "On REIT returns and (un-)expected inflation: Empirical evidence based on Bayesian additive regression trees," Finance Research Letters, Elsevier, vol. 30(C), pages 160-169.
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    More about this item

    Keywords

    REIT returns; Inflation hedge; Mispricing; G12; R31; E44; C32;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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