these markets. The impulse responses also suggest that in many cases it takes a while before
the real estate prices wholly absorb new information regarding unexpected changes in the
fundamentals. This may generate predictability in real estate returns both in the REIT market
and in the direct market.
The estimated reactions of REIT returns to shocks in the risk premium differ from
those reported by Ewing and Payne (2005), according to which the reaction is positive. While
the results by Ewing and Payne suggest flight-to-safety (from risky bonds to REITs; it is, of
course, highly questionable whether REITs are safe), our results suggest that an increase in
the risk perceived by investors lowers REIT prices via an increase in the discount factor.
Of particular interest in the impulse response analysis are whether the reaction to
shocks is notably slower in the direct market than in the securitized market, and whether and
how quickly the REIT and direct markets react to shocks in each other. The findings are in
line with the prior expectations and with the results of the Granger causality analysis. In
particular, TBI returns appear to react to innovations in REIT returns with a lag. In other
words, the information that is revealed by unexpected movements in REIT prices are
sluggishly absorbed by the direct market prices. This is particularly pronounced regarding
industrial real estate. Nevertheless, there is also evidence of a sluggish REIT price reaction to
a direct market shock in the apartment and industrial property markets. Furthermore, the
impulse responses suggest that in many cases direct market prices react more sluggishly to
shocks in the fundamentals than REIT prices. Regarding a sentiment shock this seems to be
the case in all four sectors, and there is some indication that direct apartment returns react
slowly compared with REIT returns to shocks in all the fundamentals. In contrast, REIT
prices do not appear to adjust more slowly to any of the shocks. Hence, the sluggish response
of direct real estate prices to shocks both in the fundamentals and in the REIT market causes
the perceived lead-lag relationship between REIT and direct market returns.
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