On the hedging benefits of reits: The role of risk aversion and market states


Demirer R., Yuksel A., Yüksel S. A.

Economics and Business Letters, vol.10, no.2, pp.126-132, 2021 (ESCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 10 Issue: 2
  • Publication Date: 2021
  • Doi Number: 10.17811/ebl.10.2.2021.126-132
  • Journal Name: Economics and Business Letters
  • Journal Indexes: Emerging Sources Citation Index (ESCI), Scopus, Business Source Elite, Business Source Premier, EconLit, DIALNET
  • Page Numbers: pp.126-132
  • Keywords: real estate investment trusts, risk aversion, Markov switching, hedging
  • TED University Affiliated: No

Abstract

We propose a dynamic, forward-looking hedging strategy to manage stock market risks via positions in REITs, conditional on the level of risk aversion. Our findings show that risk aversion can predict transitions to the high volatility regime in REIT markets when these markets are relatively calm. Accordingly, a hedge on/hedge off strategy based on the level of risk aversion with positions in REITs offer significant risk reduction for passive investors with the greatest benefits observed for the U.S. followed by the U.K. Our findings highlight the role of time-varying risk aversion as a predictor of REIT market volatility and the value of REIT investments as a hedge against stock market fluctuations.