Banking System Shocks and REIT Performance

The purpose of this study is to directly contrast the REIT market’s stock return response to bank failures versus bank bailouts. The non-negativity constraints of the GARCH model measuring risk dynamics are mitigated by the use of the EGARCH model. EGARCH accounts for non-symmetrical effects of risk adjustments in response to return shocks. Previous research shows that bank failures cause a positive abnormal return effect for REITs. This confirms the expectation that during crises, market participants perceive REITs as safe haven investments. Bank bailouts cause diametrical effects on REIT performance, manifesting in negative abnormal returns. Applying EGARCH, increased beta levels for both types of bank events are found, variance driven in the case of bank failures, correlation driven in the case of bank bailouts. Results from previous studies for abnormal returns are confirmed. The results of the total REIT sample is clearly driven by the Equity REITs, as Mortgage REITs show no significant reaction concerning risk and return. Retail and Residential REITs are representative for the Equity REIT sample. Especially Lodging and Specialty REITs stick out a from the Equity REITs sample, as they show unique characteristics

Bank Bailouts: REITs and their Performance as Financial Stock

This study focuses on the implications of bank bailouts on the risk and return performance of REITs and other financial stocks. Previous evidence on monetary policy finds positive value effects on REITs when federal fund rates are decreased in order to strengthen the market’s liquidity pool. Bank bailouts can also be seen as a positive monetary shock to capital markets as government intervention restores bank liquidity and thus market liquidity. However, empirical evidence on moral hazard shows that bailing out banks may increase risky behavior and benefit relatively risky assets. Therefore, we expect REITs as hard assets to underperform the market on a short term basis. In fact we find supporting evidence i.e. negative abnormal returns and beta risk increases for REITs around bank bailout announcements. This extends previous research on bank failures and REIT returns where positive abnormal REIT returns around bank failures identify REITs as a safe haven in times of market uncertainty. Furthermore we complete our research by investigating other financial stocks, finding unique results