Journal of Real Estate Finance and Economics, 28:4, 339±354, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Riskiness of REITs Surrounding the October 1997
Stock Market Decline
JOHN L. GLASCOCK*
Department of Land Economy, University of Cambridge, 19 Silver Street, Cambridge CB3 9EP, UK
College of Business Administration, University of Rhode Island, Kingston, RI 02881, USA
Department of Finance, George Washington University, Washington, DC 20052, USA
Real estate investment trusts (REITs) are viewed as low risk/low return stocks that exhibit defensive stock
characteristics. The stock market decline of October 1997 provides an excellent opportunity to examine the
riskiness of REITs during high levels of market uncertainty. We ®nd that the decline in REIT stock values was
about one-half as large as the decline of non-REIT stocks. Additionally, market uncertainty on the event day was
shown with an increased bid-ask spread for all stocks. On the following day when the market decline was partially
reversed, the bid-ask spreads continued to increase for non-REIT stocks, but declined for REIT stocks. This
suggests that REITs, like defensive stocks in general, are less prone to signi®cant declines during market-wide
disturbances. Also, we order stocks based on the standard deviation measures of risk and show that this risk
measure explains the cross-section of returns for non-REITs but is not valid for REITs.
Key Words: defensive stocks, REITs, bid-ask spreads, October 1997 market decline
Shares in real estate investment trusts (REITs) provide opportunities to invest in
diversi®ed portfolios of real estate properties with liquidity similar to other publicly traded
shares but with much greater liquidity than direct ownership of real property.
Additionally, REITs have been shown to provide in¯ation hedging bene®ts and to act
as defensive stocks.
However, some have argued that REITs provide little diversi®cation
bene®ts in a broad portfolio. For example, Gyourko and Nelling (1996) ®nd little bene®t in
adding REITs to general portfolios and Paladino and Mayo (1998) ®nd high correlations
between returns on REITs and the stock market.
The question in general is whether or not
REITs add value to a well-diversi®ed portfolio. A key issue in this area is what is the
behavior of REIT stocks during periods of signi®cant market decline.
Glascock (1991) argues that REIT betas shift with market conditions: betas are higher
*Author for correspondence.