Asymmetric Dependence in Real Estate Investment Trusts: An Asset-Pricing Analysis

REITs are often assumed to be defensive assets having a low correlation with market returns. However, this dependenceis not symmetric across the joint-return distribution. Disappointment-averse investors with state- dependentpreferences attach (dis-)utility to investments exhibiting (lower-tail) upper-tail asymmetric dependence. We find strong empirical evidence that investors price this asymmetric dependencein the cross section of US REIT returns. In particular, we show that REIT stocks with lower-tail asymmetric dependenceattract a risk premiumaveraging 1.3 % p.a. and REIT stocks exhibiting upper-tail asymmetric dependenceare traded at discount averaging 5.8 % p.a. We find no evidence that the equity β is positively priced in US REIT returns. Our findings imply that traditional estimators of REIT costof capitaland performance measurement are likely to be substantially misrepresentative.