Academic journal article Journal of Real Estate Portfolio Management

The Day-of-the-Week Effect and Value-at-Risk in Real Estate Investment Trusts

Academic journal article Journal of Real Estate Portfolio Management

The Day-of-the-Week Effect and Value-at-Risk in Real Estate Investment Trusts

Article excerpt

Executive Summary. This study examines the day-of-the-week effect on the prices of mortgage real estate investment trusts (MREITs). The day-of-the-week effect (hereafter, GARCH-DWE) was also further analyzed by controlling for interest rate level effect with GARCH-DWE (hereafter, GARCH-DWE-Level) models. The empirical results show that the day-of-the-week effect and the interest rate level effect have a significant effect and that the goodness-of-fit for the GARCH-DWE-Level model performs better than OLS and the GARCH-DWE model based on the LR test, implying that adding the day-of-the-week effect and the interest rate level effect to the model are useful practical applications for investors. Moreover, we find that MREITs have abnormal positive returns on Tuesday and Friday and abnormal negative returns on Wednesday. Finally, the examination of the Value-at-Risk model shows that the GARCH-DWE-Level model is more accurate than either of the GARCH-DWE and GARCH models, implying that the GARCH-DWE-Level model is still the optimal model for practical purposes.

The market efficiency hypothesis suggests that security prices adjust rapidly and accurately to new information. One of the most important issues is the day-of-the-week effect in the market efficiency hypothesis. With regard to the literature on the day-of-the-week effect, many studies focus on stocks (French, 1980; Gibbons and Hess, 1981; and Keim and Stambaugh, 1984), bonds (Gibbons and Hess, 1981; and Flannary and Protopapadakis, 1988), futures markets (MacFarland, Pettit, and Sung, 1982; and Corhay, Fatemi, and Rad, 1995), and the foreign exchange market (MacFarland, Pettit, and Sung, 1982; and Corhay, Fatemi, and Rad, 1995). However, real estate investment trusts (REITs) have become a popular financial asset in recent years, although few studies have examined the returns on REITs in order to find evidence for some of these anomalies. Hence, this study is interested in examining the day-of-the-week effect of REITs.

A number of studies have used the ordinary least squares (OLS) model to investigate the day-of-theweek effect; however, the OLS model fails to take autocorrelation and heteroscedasticity into consideration. To address the problem, most studies have advocated using the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) approach to analyze the day-of-the-week effect in the stock, bond, futures, and exchange rate markets,1 while only a few studies have used it in relation to REITs. The purpose of this study is to provide an examination of whether the returns for MREITs exhibit the day-of-the-week effect; thus, we use the GARCH model to examine the day-of-the-week effect (hereafter, GARCH-DWE). Moreover, since the fluctuation in the interest rate moves in a reverse direction to that in the prior period, Chan, Karolyi, Longstaff, and Sanders (1992) add the interest rate level to revise the GARCH model to a GARCHLevel model. The previous studies indicate that REITs are highly correlated with the interest rate2; however, these studies have not accounted for the interest rate level effect on REITs. According to past studies, all kinds of REITs are found to be highly correlated with the interest rate, especially mortgage REITs (MREITs). Hence, this study extends the GARCH-DWE model and incorporates the level effect (hereafter, GARCH-DWELevel model) to examine both the day-of-the-week effect and the interest rate level effect in the MREIT markets.

In recent years, managing and assessing risk has been a key issue, and Value at Risk (VaR) has been widely used to assess the risk exposure of investments.3 While previous studies have found that returns have day-of-the-week effects, very few studies have examined VaR with the day-of-the-week effect. To the best of the authors' knowledge, there have not been any studies that have taken the dayof-the-week effect into consideration to estimate VaR. Thus, this paper will use the practical application of VaR with the day-of-the-week effect as well as without the day-of-the-week effect to prove that the GARCH-DWE-Level model will be the best model for forecasting risk. …

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