Applying the Fama and French three-factor model to analyze risk/reward in the Spanish REITs: an ARDL approach

Abstract

Purpose This paper aims to analyse the risk and excess returns of the Spanish real estate investment trusts (S-REITs) using various methods, though focusing primarily on the Fama-French three-factor (FF3) model, over the period from 2007Q3 to 2017Q2. Design/methodology/approach The autoregressive distributed lag model is used for the empirical analysis to test long-term stable relationships between variables. Findings The findings indicate that the FF3 model is suitable for the S-REITs market, better explaining the S-REITs’ returns variation than the traditional single-index capital asset pricing model (CAPM) and the Carhart four-factor model. The empirical evidence is reasonably consistent with the FF3 model; the values for the market, size and value are highly statistically significant over the analysis period, with 68.7% variation in S-REITs’ returns explained by the model. In the long run, the market factor has less explanatory power than the size and value factors; the positive long-term multiplier of the size factor indicates that small S-REIT companies have higher returns, along with higher risk, while the negative multiplier of the value indicator suggests that S-REITs portfolios prefer to allocate growth REITs with low book-to-market ratios. The empirical findings from a modified FF3 model, which additionally incorporates Spain’s gross domestic product (GDP) growth rate, two consumer price index (CPI) macro-factors and three dummy variables, indicates that GDP growth rate and CPI also affect S-REITs’ yields, while investment funds with capital calls have a small influence on S-REITs’ returns. Practical implications The regression results of the standard and extended FF3 model can help researchers understand S-REITs’ risk and return through a general stock pattern. Potential investors are given more information to consider the new Spanish investment vehicle before making a decision. Originality/value The paper uses standard techniques but applies them for the first time to the S-REIT market.

Fama and French (1993) Three-Factor Model: Evidence from Conventional and Shariah-Compliant Portfolios in Bursa Malaysia

“…Even though the Fama-French three-factor model beats the CAPM, Sutrino and Nasri (2018) suggest that other factors should be taken into account when creating asset pricing models that better reflect stock return variability in the Indonesian stock market. Therefore, the FF3F became desirable to many researchers to explain portfolio return in different countries, such as O'Brien (2007) in Australia; Lawrence, Geppert and Prakash (2007) in the USA; Su and Taltavull (2021) in Spain; Atodaria, Shah and Nandaniya (2021) in India; Al-Mwalla and Karasneh (2011) in Jordan; Allen and Cleary (1998), Drew and Veeraraghavan (2002), Lai andLau (2010), andShaharuddin, Lau andAhmad (2017) and Bakar and Rosbi (2019) in Malaysia.…”

“…While the FF5F offered a better return explanation in Eastern Europe and Latin America, the evidence revealed that the FF5F did not offer a better return explanation in Asia where the FF3F was a better option. Su and Taltavull (2021) tested the FF3F in the real estate investment trusts in Spain from Q3-2007 to Q2-2017 by applying the autoregressive distributed lag model. Based on the study's results, the researchers concluded that FF3F is an adequate model to explain the performance of the real estate investment trusts in Spain compared to the Carhart four-factor model and CAPM.…”

Using Three-factor and Five-factor Models to Explore the Impact of the Covid-19 on the US Stock Health Care Industry

“…The Autoregressive Distributed Lag (ARDL) model was used by Su and Paz to empirically analyze the Spanish REIT market. The study finds that the FF3 model can better reflect return on investment in Spanish REIT market than the traditional CAPM model and another model which was called the Carhart four-factor model, and the market factor is less convincing than the size factor and the value factor in the long run [2]. Wu et al gave up the classic market capitalization (SMB) and book-to-market ratio factors (HML) and replaced them with exchange-traded fund (ETF) factors to reconstruct the traditional FF model to investigate whether the addition of new factors would improve the Fama-French model.…”

The financial risk of real estate combined factor analysis with grey prediction in Liaoning Province

“…The results showed that China’s real estate financial risk had certain spatial relevance, and the housing vacancy rate had a positive impact on real estate financial risk. Su Zheny et al [ 14 ] used the Fama French three factor (FF3) model to conduct a real estate return risk analysis, and found that the change in return rate of S-REITs was 68.7%. In the long run, market factors had less explanatory power than scale and value factors; The positive long-term multiplier of the scale factor indicated that small S-REIT companies had higher returns and higher risks, while the negative multiplier of the value indicator indicates that the S-REIT portfolio tended to allocate growth REITs with lower book to market ratios.Xu et al [ 15 ] used the real estate financial data of 31 provinces in China from 2006 to 2018 to study the risk of the real estate financial composite index.…”