A lead-lag relationship between price premium and NAV in property fund and REIT

Abstract

Property fund and real estate investment trust (REIT) play an important role in asset allocation since it increases risk-adjusted return and diversifies portfolio risk. However, in stock market, price of property fund and REIT is deviated from its fundamental value or net asset value (NAV) causing price premium or discount. Understanding causes of price deviation helps investor to plan for investment strategy and generates more profit. Therefore, this paper aims to study the role of price premium in forecasting future performance of property fund and REIT by using vector autoregressive analysis (VAR). Moreover, we examine causes of price premium by studying price pressure from REIT mutual funds trading and investors’ sentiment effect. Unlike previous studies, the results indicate that there is no relationship between price premium and NAV. However, we find that premiums are mainly caused by changing in investor sentiment while REIT mutual funds trading shows no effect to price premium. Furthermore, we find no evidence that price premium reverses to its fundamental price.