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Mar 28, 2024

Assignment Task


I will argue that REITs are alternative investment vehicles in volatile financial markets. For this I will analyze the correlation of the Charles Schwab U.S. REIT ETF with the benchmark the S&P 500. In addition I will provide quantitative analysis results performed in EViews Gretl to justify my hypothesis.

Literature review                                    

Securities and Exchange Commission (SEC) issued a ban on short selling from September 19 through October 8, 2008, on around 800 stocks. This ban was imposed preceding the bankruptcy filing of Lehman Brothers, “breaking of the buck” by the Reserve Primary Money Market Fund, which means that the net asset value of the money market fund fell below $1. Initially, REITs were excluded from the ban, however, the management of fourteen REITs requested to be included in the restricted list. Devaney uses the GARCH model to analyze the impact of the SEC policy on the risk/return of the fourteen restricted REITs, and a sample of fifty REITs, unrestricted REITs (2012). One of the objectives of the research paper was to determine if the short sale ban was successful in reducing the volatility in both restricted and unrestricted REITs. The second mission of the analysis was whether the ban resulted in economically exploitable skewness, which would be reflected in abnormal positive returns.

REITs are valued for their diversification benefits, high dividend paying features, and the behavior of returns with respect to the securities markets. REIT managers believe that artificial volatility was created in the market due to Exchange Traded Funds and “naked shorting”. Naked shorting occurs when brokers/traders are not borrowing the shares of the stocks they are shorting. This results in failure to deliver, which means that number of stocks have not been delivered to investors. The threshold list was where companies had to close their failures of delivery by the 13 th day after the trade. Before the short sell ban, the list rapidly increased to over 500 issues with about $600 billion valuation, which included mostly REITs and stocks. In September of 2008, SEC demanded that short sellers who have sold shares but not delivered them to buyers within three days, to deliver them at the start of the fourth trading day. Following this, the threshold list decreased from 100 issued by December of 2008. The research concluded by Devney suggested that instead of mitigating the volatility, just like SEC mandated, the REIT returns became more volatile (2012). In addition, there was only one day of significant abnormal positive returns which occurred on the 13 th day of the ban for the unrestricted group. Other trading days did not show that there were abnormal positive returns for the restricted and unrestricted groups. However, the short sell moratorium and the four-day delivery rule reduced the number of failures to deliver.

Another study conducted by Demir, E., Gozgor, G., & Lau, C. K. M. (2021) that focuses on the question of REITs performance during Covid suggests that stock market was crashed in March 2020 after outbreak of COVID-19. Main industries that was impacted were petroleum, entertainment and hospitality while healthcare, natural gas, food and software stocks saw incline in equity values.

Bassman, Z.umar, T.Teplova addressed the question of REITs volatility during Covid-19 outbreak using quantitative regression analysis. They have collected data of top performing REITs on various markets such as UK, USA, Asian, Europe and Australia. In their findings they discovered that the confidence level of investors has diminished during the pandemic and advise investors to think twice in such unexpected and unknown times where to invest money as such unexpected periods results in policymakers taking action to limit spread of unknown.    

Reasercher Halim Kazan in his paper argues about the importance of diversified portfolios for investors to hedge unsystematic risks. H.Kazan analyzes Credit Portfolio item selection namely textile, construction and wholesale  and used Markowitz practice to conduct his analyses.

Frank Fabozzi from Jons Hopkins University has numerous articles regarding real estate market. In his article, “Legacy of Modern Portfolio Theory” he has noted Markowitz practice as “normative theory” unlike CAPM model which is “Positive theory”.

Research Question

Can REIT ETFs be a financial security vehicle to hedge against volatile markets?

How do REITs perform in a period of economic downturn? Are REITs more prone than Stock markets to global downturns?

Research object

The behavior of REITs ETF during periods of volatility/economic uncertainty such as 1)real estate crash(particularly the 2008 crash) and 2)COVID(2020) 3) the current 2022 April with the unfolding of the Russia-Ukraine war.

Research design

I will conduct an extensive quantitative analysis on Charles Schwab U.S. REIT ETF and the benchmark market which is the S&P 500 in EViews/STATA/GRETL. I will conduct a Capital Asset Pricing Model (CAPM) analysis to find the beta or the responsiveness of the Schwab ETF to the market. In addition, I will comment on the idiosyncratic or the systematic risk of the REIT. Moreover, I will assess the correlation of the REIT with respect to the S&P 500.

Quantitative data collection and analysis

In order, to bring data into Eviews, I will download the monthly price history of the Charles Schwab U.S. REIT ETF (SCHH) over a five-year period. In addition, I will use SPDR’s S&P 500 ETF trust as a reference to the S&P 500, because Yahoo Finance does not let to download the original S&P 500. Moreover, to conduct the CAPM analysis, I will bring the Effective Federal Funds Rate from the FRED database. Effective Federal Funds Rate will serve as a reference to the risk-free rate in the CAPM equation. As the Fed Funds Rate is a daily data, I will perform a frequency conversion in EViews. After I bring the data into a work file, I will construct a series of price changes for the SCHH ETF and the S&P 500. Database: Refinitiv and FRED Dat.

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