Contrarian Effect of REITs and the Sources of their Profitability

Abstract

The current literature documents that the contrarian effect in the REIT markets can be attributed to investor overreaction. The objective of this article is to explore whether factors other than investor overreaction may also cause the REIT's contrarian effect. We find that, first, the contrarian portfolios in the REIT markets are still profitable even after we control for the risk of these portfolios. Second, by decomposing the contrarian returns of REITs, we show that three factors account for this contrarian phenomenon: investor overreaction, the cross-autocorrelation effect, and the crosssectional return-variation effect. Our analysis suggests that the observed REITs' contrarian returns would have been even larger if the cross-autocorrelation effect were absent. The cross-sectional return-variation effect significantly decreases the contrarian profitability of REITs. Overall, our research indicates that investor overreaction is not the only factor explaining the REITs' contrarian effect. Both the cross-autocorrelation effect and the cross-sectional variation effect contribute to the contrarian profitability of REITs.