The Pricing of Interest Rate Risk: Evidence from U.S. REITs
No Thumbnail Available
Date
2024-09-19
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
University of Nottingmah
Abstract
This study examines the pricing of interest-rate risk in U.S. REITs, which have gained
increasing interest from investors and academic researchers in recent years. Using a two-factor
Arbitrage Pricing Theory (APT) design, this current study was based on data collected over five
years, including total returns for U.S. equity REITs, interest rate changes, and returns for
relevant market indexes. Empirical results indicate that REITs are significantly negatively
sensitive to interest rate fluctuations, which suggests that for investors, there should be a
premium compensation against such risk. This paper stipulates the interest rate effect as an
important factor that investors and policymakers cannot afford to neglect when making
decisions and formulating their investment strategies.
Description
The analysis herein substantially extends our understanding of how changes in interest rates affect U.S. REIT performance. Guided by the realization that one of the most significant risks affecting REITs is interest rate risk, our findings affirm that such investments are vulnerable to interest rate changes and epitomize the relevance of prevailing conditions of interest rates in creating investment portfolios. Results, which show that with each 1% change in the interest rates, a 0.40% decline in the REITs returns, through that linkage are able to demonstrate an intrinsic tie between macroeconomic variables and sector-specific investments. The statistical significance relation of such would therefore mean that the market participants should factor in an interest rate 41 forecast in their various investment strategies. This assumes real relevance as global financial markets navigate through a landscape typified by ever-changing monetary policies. More importantly, besides portfolio management, the implications of these findings go further than the implications for policymakers, who need to consider how changes in interest rates will impact market stability and, indeed, the overall economy. In this regard, a better understanding of REIT sensitivities provides a more informed approach to monetary policy formulation. With this in mind, policymakers might analyze the potential market vulnerabilities and design regulatory frameworks to protect both investors and the entire financial system from undue risks of rising or volatile interest rates.
Keywords
Economics, REITs Real Estate Economics, APT, Financial Economics, Interest Rates, Financial Risk