The Asymmetric REIT-Beta Puzzle

Executive Summary. Recent investigations into the behavior of real estate investment trusts (REITs) point to an asymmetric relationship between the returns of REITs and those of the general market. Specifically, REIT returns more closely track the general market when markets are declining than when they are rising. In this article, we provide further evidence on the nature of this ‘return-dependence’ in REIT betas and investigate its origins. We advance and test three explanations for this pattern, namely (1) the decay in the REITs-stock market relationship; (2) dividend-related effects; and (3) small-stock effects. The evidence suggests that the asymmetry in beta is not the product of dividend effects or a declining REIT-market relationship. Instead, the pattern in REIT betas is similar to small capitalization stocks in general. However, the traditional explanations for the small stock effect in betas are not found to satisfactorily describe the beta pattern in REITs. Notably, the asymmetry in betas, particularly in small stocks, has been thought to arise from returns being related to their variances. We find that the asymmetry in REITs' betas persist even when we control for such variance effects.