Time-Varying Betas of US REITs from 1972 to 2013

This study estimates the time-varying REIT betas with a structural time series model using monthly REIT return data for the periods from 1972 to 2013. Based on the FTSE-NAREIT return indices for the equity REIT (EREIT) and mortgage REIT (MREIT), we found corrorative evidence of the temporal declines in the betas of the two REITs up to 1999. The time-varying beta characteristics of the two REIT betas are fundamentally different in the 2000s. While the MREIT betas continued to decline, the EREIT betas showed a sharp reversal of the downward trend. Coinciding with the low interest regime in the US, EREITs use more external debt to fund new acquisitions and development activities, and as a result, the EREIT betas increased sharply in 2000s. The EREIT data hit the peak in 2009; and declined thereafter when active deleveraging occurred in the market. Using frim level data, we constructed two leverage-sorted EREIT portfolios, and our empirical results do not reject the leverage effects on time-varying EREIT betas. However, the leverage effect in our tests is not triggered by the declines in stock prices as proposed in the finance literature