Abstract
Spatial linkages in returns have not yet received much attention in an asset pricing context, however, they can capture important information about idiosyncratic externalities associated with firms’ holdings. We explain returns of real estate companies by modelling the spatial comovement across their underlying assets. We connect stocks of real estate firms using the location of their property portfolios and show that spatial linkages across real estate assets explain some of the variation in abnormal returns, controlling for exposure to systematic factors and firm characteristics. We propose a trading strategy that exploits the information contained in the spatial linkages of the underlying assets. We show that a long-short hedge that sells the stocks that experience a drop in the price if their connected stocks have also gone down in price and buys the stocks that experience an increase in the price if their connected stocks have also gone up delivers a non-market return of 9.7% per year.
Highlights
The impact of geographic location on REITs’ performance has received widespread attention by researchers and investors
We show that spatial linkages between property holdings of real estate firms matter for the performance of those companies as the former contain additional information that is not captured by common factors
We model spatial comovement across abnormal returns of real estate companies to show that spatial linkages have a significant explanatory power for firm performance
Summary
The impact of geographic location on REITs’ performance has received widespread attention by researchers and investors. Gyourko and Nelling (1996) and Ambrose et al (2000) find that geographic specification of a REIT’s property portfolio has no economic impact on firm returns. In line with the home bias theory, Ling et al (2017b) find a significant positive relation between home market concentrations and firm returns. Ling et al (2017a) find a significant positive impact on REITs’ returns stemming from the exposure to the so called ‘Gateway’ markets related to the ability of REIT managers to both identify the outperforming MSAs and overcome the costs and delays associated with increasing allocations to these MSAs
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