The Role of Correlated Trading in Setting REIT Prices
Kevin C. H. Chiang
Published online: 3 March 2009
Springer Science + Business Media, LLC 2009
Abstract This study investigates the role of correlated trading by individuals in
setting equity real estate investment trust (REIT) prices. Consistent with existing
literature, this study finds that there is a common element in correlated trades that
drives both traditional closed-end fund prices and REIT prices. Perhaps more
important, we find evidence suggesting that (1) the effects of correlated trading on
REIT prices are stronger for those REITs that are hypothesized to be preferred by
individual investors, and (2) this linkage is stronger when the REIT market is hot
and exuberant; i.e., when the average share turnover in the REIT market is high.
There is an extensive literature suggesting that traditional closed-end stock fund
prices are influenced by correlated trading among individual investors even though
the fundamentals of closed-end stock funds have little in common (Bodurtha et al.
1995; Lee et al. 1991).
Correlated trading, in this sense, refers to the tendency that
some investors buy and sell similar securities en masse (Feng and Seasholes 2002,
It is often suggested that closed-end stock funds are individual
J Real Estate Finan Econ (2010) 41:320–338
Some researchers believe that investor sentiment drives stocks returns. This belief is echoed in sentiment-
based modeling, which has become an area of increasing interest among many researchers, including
Baker and Stein (2004), Barberis et al. (1998), Daniel et al. (1998), De Long et al. (1990), Hong and Stein
(1999), and Odean (1998).
The term “herding” is often used to describe this tendency when these trades are originated by
K. C. H. Chiang (*)
School of Business Administration, University of Vermont, 315 Kalkin Hall, 55 Colchester Avenue,
Burlington VT 05405-0157, USA
Department of Finance, National Yunlin University of Science and Technology,
Douliou, Yunlin 64002, Taiwan