Asymmetric dynamics in REIT prices: Further evidence based on quantile regression analysis

a r t i c l e i n f o This study examines whether mean reversion in REIT prices presents an asymmetric behavior across various quantiles. Distinguished from previous literature that applied the traditional linear unit-root test, a state-of-the-art quantile unit-root test is employed to identify financial asset predictability in five real estate investment trust (REIT) classifications. Our empirical results reveal a distinct pattern that mean reversion is found for those relatively high REIT prices, while random walk properties only exist for those relatively low REIT prices. More specifically, the higher the price is, the faster the speed of mean reversion of REIT toward its long-run equilibrium will be. The issue of whether financial asset prices follow a random walk or revert to the long-run trend has relevant financial implications. This conflict of interest is motivated by the predictability of financial market returns and implication on investment strategies and decisions. In the case of random walk, price level adjustments are random and unpredictable. On the other hand, mean reversion demonstrates that investors are able to develop a trading strategy to profit from the predictable returns. Therefore, empirical research studies in finance have long presented a great deal of attention on the time-series properties of financial asset prices to mention a few. Despite this extensive research, the empirical evidence on mean reversion in financial asset prices is still inconclusive. Yet another investment vehicle appears to be on the way, in the form of real estate securities. Real estate investment trusts (REITs) have played an increasingly key role in US real estate investment. REITs not only provide alternative investment channels to investors, but also enable individual investors to invest in real estate or real estate-related assets. As discussed by Payne and Zuehlke (2006), the cyclical behavior of REITs has become a critical issue as their increasing growth to be an investment vehicle for investor. Our motivations for the present study are rooted in whether REIT prices can be characterized as unit-root (random walk) or mean reverting (trend stationary) processes. If REITs are mean reverting, then a series should return to its long-run trend whose path is determined by structural fundamentals over time and it should be possible to forecast future movements in REITs based on past behavior, providing information for financial investment decisions and strategies. By contrast, if REITs are a unit-root process, then any shock to REITs is likely to …