Abstract
This paper explores the time-varying relationship between the return and risk for the portfolios in the US real estate investment trusts (REITs) market. Three classes of REITs portfolios are sorted on size, momentum and book-to-market. The empirical results place a positive trade-off between the return and predictable covariation in all REITs portfolios. Furthermore, this paper examines the significance of intertemporal hedging demand in each REITs portfolio by extending the Intertemporal Capital Asset Pricing model (ICAPM) with a set of prevailing macroeconomic variables and financial market indicators, which indicate that the predictable movements in return could be attributed to the change in covariances with these innovations. The conclusive results show that innovations in inflation rate, de-trended short-term interest rate, Fama-French momentum factor, S&P/Case-Shiller home price index, and Barclay Capital long-term government/corporate bond index play a crucial role in hedging demand for REITs portfolios.
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