Momentum Strategies and Investor Sentiment in the REIT Market

Abstract

Comparing across three momentum measures, we empirically find that the 52‐week high strategy plays a dominant role in generating momentum profits in the Real Estate Investment Trust (REIT) market. The profitability of the 52‐week high strategy, however, varies with the state of investor sentiment. Specifically, we find that the 52‐week high momentum earns significantly positive returns following optimistic periods and significantly negative returns following pessimistic periods. Further evidence indicates that investor sentiment serves as a better predictive variable in explaining the REIT momentum than market states, business cycles, legislation changes, and monetary policy changes. Overall, our findings are in line with behavioral theories in explaining the REIT momentum.

Does Default Risk Matter for Investors in Reits

“…A default risk investment strategy (long low default risk REITs and short high default risk REITs) generates a return of 15% per annum or a risk-adjusted return around 20% per annum. The returns from a default risk premium strategy are greater than those for other REIT return strategies identified in the literature such as momentum (Hao et al, 2016), idiosyncratic (Ooi et al, 2009;Cakici et al, 2014), or asset growth (Ling et al, 2019). Thirdly, we investigate the effects of various factors which potentially affect the relationship between default risk and REITs returns, and we do not find evidence that the default risk premium can be significantly explained by firm size, book-to-market equity ratio, asset growth and idiosyncratic volatility.…”

“…The formulas of those asset pricing models are as follows: Chui et al (2003), and Guidolin and Pedio (2019). We use common stock risk factors so that we can compare our results with the common stock literature and the REIT literature that also uses common stock risk factors (see, among others, Ooi et al, 2009;Cakici et al, 2014;Hao et al, 2016;Ling et al, 2019).…”

“…In the spirit of existing literature on discovering anomalies in REITs (see, among others, Anzinger et al, 2017;Cakici et al, 2014;Chung et al, 2016;DeLisle et al, 2013;Hao et al, 2016;Ling et al, 2019;Lin et al, 2009;Ooi et al, 2009), we measure the default risk of US REITs and investigate whether the risk is priced in or not. This study contributes to the growing literature on understanding default risk as well as highlighting a potential investment strategy for investors in REITs.…”

Random Walks and Market Efficiency: Evidence From Real Estate Investment Trusts (Reit) Subsectors

“…Moreover, Feng, Price, and Sirmans (2014) documents momentum in REIT subsectors of apartment, industrial, office and retail. Recently, Hao, Chu, Ko, and Lin (2016) find that the 52-week high momentum strategy is profitable when applied to REITs especially after optimistic periods with high investor sentiment. Thus, momentum seems to be a robust anomaly to the market efficiency of REITs.…”

Overreaction‐based momentum in the real estate investment trust market

“…2 2 Some researchers have attempted to explain REIT momentum by using risk‐based theories (e.g., Derwall et al, 2009; Goebel et al, 2013; Hung & Glascock, 2008, 2010; Stevenson, 2002), whereas others have employed behavioral perspectives to explain REIT momentum (e.g., Chui et al, 2003a; Hao et al, 2016). …”