Journal of Real Estate Finance and Economics, 24:3, 319±330, 2002
# 2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
REIT Risk Premium Sensitivity and Interest Rates
Emporia State University, Emporia, KS 66801, Kansas, USA
School of Business, The University of Texas of the Permian Basin, Odessa, TX 79762, Texas, USA
K. MICHAEL CASEY*
School of Business, Henderson State University, 1100 Henderson Street, Arkadelphia, AR 71999, Arkansas,
This analysis investigates several aspects of the relationship between daily REIT stock risk premiums and various
interest rates. Consistent with prior research, the general ®ndings indicate that interest rates do impact REIT
returns. This study speci®cally ®nds that stock returns are more sensitive to maturity rate spread between short-
and long-term treasuries than the credit rate spread between commercial bonds and treasuries. In addition, the
analyses document a structural model shift during the nineties that has made REITs more sensitive to credit risk.
In additional to change in investor clientele, an analysis of declining REIT credit-worthiness points to a root cause
for this shift.
Key Words: REITs, risk premiums, interest rates, credit risk, multi-factor asset pricing
Real estate investment trusts (REITs) provide capital to the real estate industry through the
securitization of real property holdings. During the nineties, REITs attracted considerable
attention because of their proliferation, tax advantages and value generation (Kirkpatrick,
1997; Pacelle, 1997; Templin, 1998). Decker (1997) predicts that the growth of REIT
capitalization and assets will continue far into the future. The National Association of Real
Estate Investment Trusts (NAREIT) more than doubled its membership during the sample
period (1989±1998). Examination of an expanding area of ®nance is important in its own
right. This paper examines the differences in time periods re¯ective of market factors in a
clientele shift among REIT investors.
Han and Liang (1995) summarizes past REIT studies which utilized a variety of indexes
and time periods. They note that the index selected and time period studied in¯uence the
particular study's results. Glascock et al. (2000) results indicate that the pricing
*Author for correspondence.