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The Conditional CAPM and Time Varying Risk Premium for Equity REITs

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  • Mohammad Najand
  • Crystal Yan
  • Elizabeth Fitzgerald

Abstract

Executive Summary.Given the recent interest in Real Estate Investment Trusts (REITs), this study investigates whether REITs provide investors with a superior risk-return trade off. Utilizing a conditional CAPM, the findings reveal that equity REITs have outperformed the stock market with an average abnormal annual return of 2.25% with a low time-varying beta of around .24 during the June 1995 to December 2003 period. Utilizing time-varying risk premium models for equity REITs with GARCH specifications, the findings reveal that both the ARCH and GARCH effects are significant in the estimated models. In addition, the volatility shocks are quite persistent. The results show that the market returns and the first-order autocorrelation help explain the excess returns of equity REITs. However, the movement of interest rates contributes to equity REIT returns only when the market return is not present in the models.

Suggested Citation

  • Mohammad Najand & Crystal Yan & Elizabeth Fitzgerald, 2006. "The Conditional CAPM and Time Varying Risk Premium for Equity REITs," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 12(2), pages 167-176, January.
    • Handle: RePEc:taf:repmxx:v:12:y:2006:i:2:p:167-176
    DOI: 10.1080/10835547.2006.12089753
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