Extrapolation Theory and the Pricing of REIT Stocks

30 Pages Posted: 12 Apr 2007 Last revised: 14 Nov 2007

See all articles by Joseph T. L. Ooi

Joseph T. L. Ooi

National University of Singapore (NUS) - Department of Real Estate

James R. Webb

Cleveland State University

Dingding Zhou

National University of Singapore (NUS)

Abstract

This study evaluates the investment prospects of value stocks in the real estate investment trust (REIT) market. Value stocks are defined as those that carry low prices relative to their earnings, dividends, book assets, or other measures of fundamental value. The empirical results show that from 1990 onwards, value REITs provide superior returns without exposing investors to higher risks. The evidence is consistent with the extrapolation theory, which attributes the mispricing to investors over extrapolating past corporate results into the future. Interestingly, the findings reveal that such extrapolation is asymmetric in the REIT market. While value REITs are underpriced in accordance with the extrapolation theory, no evidence is found that growth REITs are overpriced. The value anomaly also exhibited several temporal traits. Firstly, the value premium varies over time. Secondly, the magnitude of the premium is inversely associated with the market performance. Finally, the value anomaly is not evident in the pricing of REITs in the 1980s.

Keywords: value stock, REIT

JEL Classification: L85, R33, R30, R31

Suggested Citation

Ooi, Joseph T. L. and Webb, James R. and Zhou, Dingding, Extrapolation Theory and the Pricing of REIT Stocks. Journal of Real Estate Research, Vol. 29, No. 1, 2007, Available at SSRN: https://ssrn.com/abstract=979012

Joseph T. L. Ooi (Contact Author)

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

James R. Webb

Cleveland State University ( email )

1860 E. 18th St., BU 327E
Cleveland, OH 44115
United States
216-687-4716 (Phone)
216-687-4716 (Fax)

Dingding Zhou

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

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