The purpose of this paper is to examine the US real estate investment trusts (REITs) for the 2000‐2012 period using GARCH models that include the day‐of‐the‐week effect and the stock‐market index as explanatory variables. This technique documents the return and volatility of equity, mortgage and hybrid REITs.
The study starts with a CAPM model and continues with GARCH(1,1), TGARCH(1,1) and EGARCH(1,1) models for each of the REIT subcategories with and without the days of the week as dummy variables.
The results show that the best‐fitted model is EGARCH except the equity REIT series without the dummy variables that is better described with the GARCH. The stock market has a significant impact on REIT returns but no remarkable significance in respect of the day‐of‐the‐week effect.
The findings suggest that there is not a significant risk diversification potential between REITs and common stocks. In the scope of the credit crisis which originated in the real estate market it must be taken seriously into consideration that REITs, except of the equity REITs, are more sensitive to bad news.
This paper uses daily returns for each of the three main REIT subcategories opposed to the monthly that are commonly used. We point out the evidence of asymmetric responses, suggesting the leverage effect and differential financial risk depending on the direction of price change movements.
