Abstract
Abstract In this study, we investigate the impact of industry-based tail dependence risk on the cross-section of stock returns. To this end, we propose a novel tail risk dependence measure (industrial tail exposure risk [ITER]), which captures the tail risk exposure of individual stocks to multiple industries. Using US equity real estate investment trusts (REITs) data from 1993 to 2020, we document that stocks in the highest ITER portfolio outperform stocks in the lowest ITER portfolio by 8.40% per annum. This positive return spread is significant even after controlling for well-known firm characteristics. The return premium of ITER is stronger for small, value, and highly levered stocks and is substantially high during recession periods. Finally, the effects of ITER are cross-sectionally more associated with REITs that have greater degrees of the following factors: bivariate tail exposure risks of major industries, exposure to local industry tail risk, geographical concentration, and ownership of home-biased investors. Overall, our results suggest that REIT investors are indeed averse to tail risks that are associated with various sectors.
| Original language | English |
|---|---|
| Pages (from-to) | 1209-1245 |
| Number of pages | 37 |
| Journal | Real Estate Economics |
| Volume | 51 |
| Issue number | 5 |
| Early online date | 27 Feb 2023 |
| DOIs | |
| Publication status | Published - 1 Sept 2023 |
Bibliographical note
ACKNOWLEDGMENTSWe thank Lu Han (the editor) and an anonymous referee for constructive comments and suggestions. We also acknowledge helpful comments from Kian Guan Lim, Cristian Badarinza, Graeme Newell, Tien Foo Sing, and seminar participants at the National University of Singapore
Keywords
- asset price
- cross-section of returns
- real estate investment trusts (REITs)
- risk aversion
- tail dependence
- tail risk
Access to Document
- Song_REE_Industrial_Tail_Exposure_VOR
© 2022 The Authors. Real Estate Economics published by Wiley Periodicals LLC on behalf of American Real Estate and Urban Economics Association. This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.