The Evolution of Equity REITs Betas: Analysis from 1997 to 2014

Abstract

The paper analyzes how the betas of real estate investment trusts (REITs) evolved over the period January 1997 to December 2014 using a hybrid beta model, which shrinks rolling window estimates toward firm-specifics based on prior economic theory. Then, we compare the hybrid beta estimates to those obtained with the most common models used in practice, the CAPM and the Three-Factor model developed by Fama and French, to determine which is the most reliable tool to estimate risk factors for REITs as a particular type of industry. The results indicate that the hybrid beta model is superior to the the CAPM and Three-Factor models in estimating betas for the research sample of Equity REITs we observed over the considered period. This conclusion is based on a non-parametric test comparing the R 2 from the regressions of each model. Moreover, the annual evolution of the risk loadings obtained using the hybrid beta model seems to be more reasonable given both the specific characteristics of REITs and the impact of the world financial crises that occurred in 2008.