We conduct an empirical investigation of the exposure of U.S. REIT returns to commonality in liquidity. Taking advantage of the specific characteristics of REITs, we study three types of commonality in liquidity: within-asset commonality, cross-asset commonality (with the stock market), and commonality with the underlying property market. We find evidence that the three types of commonality in liquidity represent significant risk factors for REIT returns but only during bad market conditions. We also find that using a linear approach, rather than a conditional, would have underestimated the role of commonality in liquidity risk. This could explain (at least partly) the small impact of commonality on asset prices documented in the extant literature. We also analyze the economic sources of commonality in liquidity and find that demand-side factors prevail over supply-side factors.
Bibliographical noteWe thank Jim Clayton, Tim-Alexander Kroncke, David Ling, Charles Ka Yui Leung, Peng Liu, Henri Louberge, Greg MacKinnon, Andy Naranjo, Seow Eng Ong, and seminar participants at the 2013 ´ IRE—BS Conference on Real Estate Economics and Finance, the University of Reading Department of Real Estate & Planning seminar series, the 2014 doctoral session of the AREUEA-ASSA Annual Conference, the 2014 FSU-UF Symposium on Critical Issues in Real Estate, the 2014 Annual Conference of the Swiss Society for Financial Market Research, the Geneva School of Economics and Management research seminar, the 2014 Annual Research Symposium of the Real Estate Research Institute (RERI), the 2014 Annual Conference of the Canadian Economics Association, the
2014 International AREUEA Conference and the 2015 AREUEA-ASSA Annual Conference for their valuable comments and suggestions. Financial support by RERI is gratefully acknowledged.
- Commonality in liquidity
- Liquidity risk
- Multi-factor model
- Panel data
- Real estate securities
- Threshold regression