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The underlying return generating factors for REIT returns: an application of independent component analysis

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Lizieri, C. , Satchell, S. and Zhang, Q., (2006) The underlying return generating factors for REIT returns: an application of independent component analysis. Working Papers in Real Estate & Planning. 12/06. Working Paper. University of Reading, Reading. pp26.

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Abstract/Summary

Multi-factor approaches to analysis of real estate returns have, since the pioneering work of Chan, Hendershott and Sanders (1990), emphasised a macro-variables approach in preference to the latent factor approach that formed the original basis of the arbitrage pricing theory. With increasing use of high frequency data and trading strategies and with a growing emphasis on the risks of extreme events, the macro-variable procedure has some deficiencies. This paper explores a third way, with the use of an alternative to the standard principal components approach – independent components analysis (ICA). ICA seeks higher moment independence and maximises in relation to a chosen risk parameter. We apply an ICA based on kurtosis maximisation to weekly US REIT data using a kurtosis maximising algorithm. The results show that ICA is successful in capturing the kurtosis characteristics of REIT returns, offering possibilities for the development of risk management strategies that are sensitive to extreme events and tail distributions.

Item Type:Report (Working Paper)
Divisions:Henley Business School > Real Estate and Planning
ID Code:20760
Publisher:University of Reading
Publisher Statement:The copyright of each working paper remains with the author. If you wish to quote from or cite any paper please contact the appropriate author; in some cases a more recent version of the paper may have been published elsewhere.

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