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Applying the Fama and French three-factor model to analyze risk/reward in the Spanish REITs: an ARDL approach

Applying the Fama and French three-factor model to analyze risk/reward in the Spanish REITs: an... This paper aims to analyse the risk and excess returns of the Spanish real estate investment trusts (S-REITs) using various methods, though focusing primarily on the Fama-French three-factor (FF3) model, over the period from 2007Q3 to 2017Q2.Design/methodology/approachThe autoregressive distributed lag model is used for the empirical analysis to test long-term stable relationships between variables.FindingsThe findings indicate that the FF3 model is suitable for the S-REITs market, better explaining the S-REITs’ returns variation than the traditional single-index capital asset pricing model (CAPM) and the Carhart four-factor model. The empirical evidence is reasonably consistent with the FF3 model; the values for the market, size and value are highly statistically significant over the analysis period, with 68.7% variation in S-REITs’ returns explained by the model. In the long run, the market factor has less explanatory power than the size and value factors; the positive long-term multiplier of the size factor indicates that small S-REIT companies have higher returns, along with higher risk, while the negative multiplier of the value indicator suggests that S-REITs portfolios prefer to allocate growth REITs with low book-to-market ratios. The empirical findings from a modified FF3 model, which additionally incorporates Spain’s gross domestic product (GDP) growth rate, two consumer price index (CPI) macro-factors and three dummy variables, indicates that GDP growth rate and CPI also affect S-REITs’ yields, while investment funds with capital calls have a small influence on S-REITs’ returns.Practical implicationsThe regression results of the standard and extended FF3 model can help researchers understand S-REITs’ risk and return through a general stock pattern. Potential investors are given more information to consider the new Spanish investment vehicle before making a decision.Originality/valueThe paper uses standard techniques but applies them for the first time to the S-REIT market. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of European Real Estate Research Emerald Publishing

Applying the Fama and French three-factor model to analyze risk/reward in the Spanish REITs: an ARDL approach

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1753-9269
eISSN
1753-9269
DOI
10.1108/jerer-11-2019-0043
Publisher site
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Abstract

This paper aims to analyse the risk and excess returns of the Spanish real estate investment trusts (S-REITs) using various methods, though focusing primarily on the Fama-French three-factor (FF3) model, over the period from 2007Q3 to 2017Q2.Design/methodology/approachThe autoregressive distributed lag model is used for the empirical analysis to test long-term stable relationships between variables.FindingsThe findings indicate that the FF3 model is suitable for the S-REITs market, better explaining the S-REITs’ returns variation than the traditional single-index capital asset pricing model (CAPM) and the Carhart four-factor model. The empirical evidence is reasonably consistent with the FF3 model; the values for the market, size and value are highly statistically significant over the analysis period, with 68.7% variation in S-REITs’ returns explained by the model. In the long run, the market factor has less explanatory power than the size and value factors; the positive long-term multiplier of the size factor indicates that small S-REIT companies have higher returns, along with higher risk, while the negative multiplier of the value indicator suggests that S-REITs portfolios prefer to allocate growth REITs with low book-to-market ratios. The empirical findings from a modified FF3 model, which additionally incorporates Spain’s gross domestic product (GDP) growth rate, two consumer price index (CPI) macro-factors and three dummy variables, indicates that GDP growth rate and CPI also affect S-REITs’ yields, while investment funds with capital calls have a small influence on S-REITs’ returns.Practical implicationsThe regression results of the standard and extended FF3 model can help researchers understand S-REITs’ risk and return through a general stock pattern. Potential investors are given more information to consider the new Spanish investment vehicle before making a decision.Originality/valueThe paper uses standard techniques but applies them for the first time to the S-REIT market.

Journal

Journal of European Real Estate Research – Emerald Publishing

Published: Jul 23, 2021

Keywords: Spain; CAPM; Carhart model; Fama and French model; Real estate investment trusts (REITs); Sociedades cotizadas de inversion en el mercado inmobiliario (SOCIMIs); Capital asset pricing model (CAPM); Fama-French three-factor (FF3) model; Risk and returns; autoregressive distributed lag (ARDL)

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