Journal of Real Estate Finance and Economics, 24:3, 301±317, 2002
# 2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
REIT Returns and In¯ation: Perverse or Reverse
JOHN L. GLASCOCK*
Department of Finance, George Washington University, Washington, DC 20052, USA
Department of Finance, Yuan Ze University, Taiwan
RAYMOND W. SO
Department of International Business, Chinese University of Hong Kong, Shatin, Hong Kong
Contrary to the Fisherian theory of interest, previous studies document a negative relationship between REIT
(Real Estate Investment Trust) returns and in¯ation. In this research, we re-examine this perverse in¯ation
behavior by testing for the causal relationships among REIT returns, real activity, monetary policy, and in¯ation
through a vector error correction model. Our results indicate that the observations of REIT returns as perverse
in¯ation hedges are spurious. The observed negative relationship between REIT returns and in¯ation is in fact a
manifestation of the effects of changes in monetary policies. These ®ndings are consistent with Darrat and
Glascock's (1989) evidence of monetary effects on REIT returns.
Key Words: Perverse in¯ation hedge, REITs, VECM
Fisher's (1930) theory of interest, or more well known as the Fisher Effect, is now an
essential and an important element in the curriculum of courses in business ®nance and
investment. According to Fisher's theory, expected nominal return on an asset is equal to
its expected real return plus expected rate of in¯ation. If real return is to be kept constant,
higher in¯ation requires higher nominal return. In other words, if investors want to
maintain the same level of real returns or purchasing power, they will demand higher
nominal returns in periods of high in¯ation. From this perspective, in¯ation is a signi®cant
determinant in asset returns and it is also a key consideration in investment decisions.
Since common stocks represent claims on future consumption (stockholders give up
present consumption for returns in the future), intuitively, rational investors will require
higher returns during periods of high in¯ation in order to maintain the level of real payoffs.
Nevertheless, previous studies, (e.g. Jaffe and Mandelker, 1976; Bodie, 1976; Nelson,
*Author for correspondence: John L. Glascock, Department of Finance, George Washington University, 2023 G
Street, 540bLisner, Washington, DC 20052, USA.