This study is concerned with an empirical analysis of asset pricing. More specifically, this paper examines whether multifactor asset pricing models are able to explain variation in REIT returns in the US and Japan. In addition to traditional multifactor models, an Alternative Four-Factor Model (AFF) was developed considering net profit margin as an additional risk factor. Thence, this paper seeks to provide valuable information for investors and fund managers regarding their indirect real estate investment selection.
Using a sample period between July 1994 (US) / July 2011 (Japan) to December 2020, rigorous multiple-time-series regression is applied to calculate factor loadings for each risk factor and the corresponding alpha values of each model to evaluate their effectiveness in explaining variation and cross-section of REIT returns. Most studies on asset pricing models focus on size and value sorted portfolios as dependent variables. This paper broadens the approach with four other double sorted test portfolios to check the robustness of each single factor to explain return anomalies.
Results show that market premium and size premium represent risk factors for US-REITs, whereas market premium and value premium are suitable risk factors for Japanese-REITs. The momentum factor does not capture risk and is insignificant in both markets. The study shows low correlations between traditional and REIT specific as well as between US and Japanese risk factors. This suggests that firstly risk factors are country specific and secondly that they are asset specific.
Moreover, the Fama-French Three-Factor Model (FF3) clearly outperforms the CAPM, while the Carhart Four-Factor Model (CH4) marginally improves the explanatory power over the FF3. This is observed in both markets. Outcomes demonstrate that the Alternative Four-Factor Model (AAF) does not improve prediction power for returns of Japanese-REITs compared to the FF3 and CH4. On the contrary, results are ambiguous concerning US-REITs. While the additional risk factor, net profit margin, generates a negative return, the model is superior to the FF3 and CH4 in terms of explaining variation and cross-section of returns.
Table of Contents
1. Introduction
1.1 Rationale and Contributive Factors
1.2 Objective and Aims
2. Literature Review
2.1 Real Estate Investment Trusts
2.2 The Capital Asset Pricing Model
2.3 Stock Return Anomalies
2.4 Fama-French Three-Factor Model
2.5 Carhart Four-Factor Model
2.6 Evidence from the US and Japanese REIT-Market
2.7 Gap in the Literature
3. Empirical Framework
3.1 The Alternative Factor Model
3.2 Data Base
3.3 Methodology
3.3.1 Construction of the Risk Factors
3.3.2 Construction of the Test Portfolios
3.3.3 Regression Models and Evaluation Methods
4. Empirical Analysis
4.1 Descriptive Statistics
4.2 Regression Results
4.2.1 Variation in REIT Returns
4.2.2 The Cross-Section of REIT Returns
5. Conclusion
Research Objectives and Themes
The academic paper aims to empirically evaluate whether multifactor asset pricing models, specifically the Fama-French Three-Factor Model, the Carhart Four-Factor Model, and a newly proposed Alternative Four-Factor Model, provide superior predictive power for REIT returns in the US and Japanese markets compared to the traditional Capital Asset Pricing Model (CAPM).
- Empirical testing of market risk premium, size, value, and momentum as determinants for REIT performance.
- Comparative analysis of asset pricing model validity across different international markets (US and Japan).
- Introduction and testing of the "Net Profit Margin" (NPM) as a novel risk factor in the Alternative Four-Factor Model (AFF).
- Robustness verification using various double-sorted test portfolios beyond traditional size/book-to-market-equity sorting.
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2.1 Real Estate Investment Trusts
A Real Estate Investment Trust (REIT) is characterized by holding and operating lasting income-generating properties (equity REITs) or by generating income through financing real estate (mortgage REITs)1. By securitizing its illiquid real estate, individual and institutional investors are offered the opportunity to invest in real estate without actively managing, financing, or operating the actual buildings. Investors simultaneously benefit from fungible trading possibilities since REITs are typically listed on major securities exchanges (see, for instance, Bone-Winkel, Schäfers and Schulte (2008, p. 45), Parker (2012, p. 11)). Although REITs highly correlate with the stock market in the short-term, this relation steadily decreases and becomes insignificant over time. Instead, publicly listed REITs exhibit a strong positive correlation with direct real estate in the long-term, thus rather adapting attributes of real estate as opposed to ordinary stocks (Bienert, Sebastian and Just, 2015, pp. 72–73; Ghosh, Miles and Sirmans, 1996, pp. 46–51). This highlights the importance of separately testing whether ordinary multifactor asset pricing models are suitable for analysing REITs and thus real estate returns.
Summary of Chapters
1. Introduction: Outlines the limitations of the CAPM in explaining stock returns and introduces the motivation to test multifactor models on US and Japanese REIT markets.
2. Literature Review: Synthesizes current theories on REIT characteristics and asset pricing models, including the CAPM, Fama-French, and Carhart models, while identifying the research gap.
3. Empirical Framework: Details the construction of the author's Alternative Factor Model (AFF) incorporating net profit margin, data sources, and the methodology for constructing risk factors and test portfolios.
4. Empirical Analysis: Presents the descriptive statistics for risk factors and the results of time-series regressions and cross-sectional analysis across both markets.
5. Conclusion: Summarizes findings regarding the efficiency of multifactor models in predicting REIT returns and provides implications for future research and real estate investment management.
Keywords
Real Estate Investment Trusts, REITs, Multifactor Asset Pricing Models, CAPM, Fama-French Three-Factor Model, Carhart Four-Factor Model, Alternative Factor Model, Net Profit Margin, Systematic Risk, US Market, Japanese Market, Equity Returns, Market Equity, Book-to-Market-Equity, Momentum.
Frequently Asked Questions
What is the core focus of this thesis?
This work evaluates whether multifactor asset pricing models, originally designed for ordinary stocks, can effectively explain the returns of Real Estate Investment Trusts (REITs) in the US and Japanese markets.
What are the central thematic fields covered?
The thesis covers corporate finance, real estate management, and econometric modeling, specifically looking at how factors like firm size, value, momentum, and profitability affect REIT returns.
What is the primary research goal?
The primary goal is to empirically test whether augmenting the traditional CAPM with additional risk factors (size, value, momentum, and profitability) enhances the prediction power for REIT returns.
Which scientific methodology is employed?
The study utilizes linear time-series regressions using the Newey and West (1987) estimator to handle autocorrelation and heteroskedasticity, alongside GRS F-statistic tests for model validation.
What topics are addressed in the empirical main body?
The empirical section includes a comprehensive comparison of model fit (adjusted R²), significance of factor loadings, and the cross-sectional explanatory power determined by analyzing intercept terms (alphas).
Which keywords best characterize this research?
Core keywords include REITs, Asset Pricing, Fama-French, Carhart, Multifactor Models, Net Profit Margin, and International Real Estate Management.
How does the Japanese REIT market differ from the US in this study?
The study highlights structural differences such as the age of the REIT regimes, leverage ratios, and identifies that while traditional factors work in the US, findings in Japan often differ, particularly regarding the momentum factor.
What is the significance of the "Alternative Four-Factor Model" proposed?
The model introduces "Net Profit Margin" (NPM) as a new factor to account for firm profitability, aiming to capture systematic risk that standard models might overlook.
How do the findings influence investment strategies?
The findings provide valuable insights for fund managers, suggesting that asset-specific risk factors are crucial for REIT performance evaluation and that model selection should be mindful of country-specific market dynamics.
- Citation du texte
- Tim Perschbacher (Auteur), 2021, Empirical Analysis of Multifactor Asset Pricing Models. A Comparison of US and Japanese REITs, Munich, GRIN Verlag, https://www.grin.com/document/1370118
