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The Riskiness of REITs Surrounding the October 1997 Stock Market Decline

The Journal of Real Estate Finance and Economics

Volume 28, Issue 4, Article 3 (Abstract)

Title:

The Riskiness of REITs Surrounding the October 1997 Stock Market Decline

Author:

John L. Glascock, David Michayluk and Karyn Neuhauser

Abstract:

REITs are viewed as low risk/low return stocks that exhibit defensive stock

characteristics. The stock market decline of October 1997 provides an excellent

opportunity to examine the riskiness of REITs during high levels of market

uncertainty. We find that the decline in REIT stock values was about one-half as

large as the decline of non-REIT stocks. Additionally, market uncertainty on the

event day was shown with an increased bid-ask spread for all stocks. On the

following day when the market decline was partially reversed, the bid-ask spreads

continued to increase for non-REIT stocks, but declined for REIT stocks. This

suggests that REITs, like defensive stocks in general, are less prone to significant

declines during market-wide disturbances. Also, we order stocks based on the

standard deviation measures of risk and show that this risk measure explains the

cross-section of returns for non-REITs but is not valid for REITs.

Keywords:

defensive stocks, REITs, bid-ask spreads, October 1997 Market Decline