Bubbles in US hotel/lodging real estate investment trusts

Abstract

PurposeThe purpose of this paper is to test for the presence of bubbles in the US lodging/hotel real estate investment trust (REIT) subsector from 1994 to 2016. It also compares the profitability of a buy-and-hold strategy with several technical trading rules when applied to lodging REITs.Design/methodology/approachTo investigate speculative bubbles, the sequential right-sided unit root tests of Phillips, Shi and Yu (2015a, b) are used.FindingsThe results confirm the possibility of the existence of multiple bubbles and explosive behavior in prices and the price-dividend ratio. One of the detected bubbles coincides with the financial economic crisis of 2008 using both measures. In addition, several technical rules are found to be superior to a naïve buy-and-hold strategy even after adjusting for risk.Practical implicationsThese findings will be of interest to policy makers, who can use such models as an early alert to take anticipative action to avoid bursting of bubbles and consequent negative effects on the economy. The findings also provide important information to investors attempting to devise trading rules that utilize the signals from bubble detection, as well as to hotel executives devising policies aimed at reducing risk and creating more firm value to maximize shareholder wealth. Moreover, valuation and bubbles are important to lenders and creditors who use assets as collaterals for financing hotel REITs.Originality/valueHotels are a unique hybrid of retail and housing that combine operating business with real estate. This paper is the first to investigate speculative bubbles in lodging REITs.