Adaptive market hypothesis: evidence from the REIT market

Abstract

We tests two important implications for Real Estate Investment Trust (REIT) market efficiency from the adaptive markets hypothesis (Lo, 2004): first, market efficiency is not an all-or-none condition but is a characteristic that varies continuously over time; second, market efficiency is dependent upon market conditions. By using the automatic variance ratio test of Choi (1999), and the automatic portmanteau test of Escanciano and Lobato (2009), we confirm both implications for the US REIT market. The degree of REIT return predictability is found to be time varying. More specifically, it appears to be declining over time, which implies that the REIT market has become more efficient. Furthermore, we show that the return predictability is indeed influenced by market conditions. The level of market development appears to be the primary driver for REIT market efficiency. Other factors like inflation and the overall equity market volatility also have impacts. Finally, we demonstrate that the REIT regulatory ch...