Abstract

The efficiency of price discovery in the REIT market is an issue of enduring interest. Unfortunately, existing studies focus on REIT index data, and the general equity efficiency literature that uses individual assets typically excludes this sector. Our first contribution is a comprehensive assessment of the pricing efficiency of the U.S. REIT market that uses every listed REIT trading over the 1993-2011 period. Our variance ratio analysis finds that the typical REIT is efficient throughout our sample period. We show that the distribution of REIT-level variance ratios exhibits excess kurtosis, implying a non-trivial mass of inefficiently-priced REITs. Our second contribution is to document that the relatively inefficiently-priced REITs tend to become relatively more efficient over time, consistent with the actions of arbitrageurs. We explore the importance of informed trading, cash flow variability, and market frictions measures in explaining the cross-sectional dynamics of informational efficiency. Our third contribution is methodological: we show that quantile regression methods help to isolate the impact of arbitrageurs since they are more likely to affect the pricing efficiency of REITs in the extreme quantiles of the efficiency distribution.

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• Keyword(s):
• finance 267

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