Investor Sentiment and the Return and Volatility of REITs and Non-REITs during the Financial Crisis
The participation of noise traders in financial markets has different effects for returns and return volatility. Noise traders participate in the market is based on an external, noisy signal that conveys no information about fundamentals. Investor sentime
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REITs and Non-REITs during the Financial Crisis
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Investor Sentiment and the Return and Volatility of REITs and NonREITs during the Financial Crisis Co-authors of this chapter are N. Rottke and J. Zietz.
3.1
Introduction
The participation of noise traders in financial markets has different effects for returns and return volatility. Noise traders participate in the market is based on an external, noisy signal that conveys no information about fundamentals. Investor sentiment is such a signal. Sentiment reflects the optimism or pessimism of the market and does not need to be completely rational. The more extreme the sentiment is, the more noise traders act in the market; their trading lets prices deviate from their fundamental values. This deviation is persistent and introduces a new kind of risk - the noise trader risk (Shleifer and Summers, 1990, Sias et al., 2001, De Long et al., 1989). The current paper extends the literature on sentiment by considering the impact of institutional investor sentiment on returns and conditional volatility of different asset classes in an unstable market environment. We use a GARCH-M model to identify to what extent returns and conditional volatilities are influenced by investor A. Mathieu, Essays on the Impact of Sentiment on Real Estate Investments, Essays in Real Estate Research 9, DOI 10.1007/978-3-658-11637-8_3, © Springer Fachmedien Wiesbaden 2016
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sentiment. To capture different investment classes, we analyze US Equity REIT returns, S&P 500 returns (large cap stocks) and NASDAQ returns (small cap stocks). As noise traders are more active in extreme sentiment stages, we allow the impact of sentiment on returns and return volatility to be different during the financial crisis that started in 2007 than during tranquil times. Our main findings suggest that for REIT and S&P 500 returns the impact of investor sentiment on returns and return volatility is higher during the financial crisis than in a tranquil market environment. Further, the impact of return volatility on contemporaneous REIT and S&P 500 returns is significantly higher during the financial crisis. Generally, REIT returns and S&P 500 returns behave similarly with regard to investor sentiment. NASDAQ returns are influenced by market sentiment at large, with no particular difference observable during the financial crisis. The remainder of the study proceeds as follows. Section two specifies the theoretical background of the study. Section three describes the data, the methodology and the individual hypotheses. Section four discusses the empirical results and section five concludes with a summary of the study’s most important results.
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3.2
REITs and Non-REITs during the Financial Crisis
Theoretical Background
Several theoretical models have been developed to show that irrational trading has a long term impact on asset prices (Hirshleifer et al., 2006, Dumas et al., 2005). De Long et al. (1990) (DSSW hereafter) first model theoretically the influence of no
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