Lower partial moment-capital asset pricing model in listed property trusts

In recent years, the use of Capital Asset Pricing Model (CAPM) or beta has stimulated overwhelming debates in the finance and real estate literature. One of the main issues is the strict assumptions of CAPM. Specifically, these assumptions have been rejected by extensive real estate studies. As a result, there is not surprisingly that a large body of finance and real estate literature only found weak empirical support of CAPM. In order to obviate these limitations, numerous studies suggest using Lower-Partial Moment-CAPM (LPM-CAPM) or downside beta rather than traditional CAPM. However, there is relatively little study that has been undertaken on the LPM-CAPM in Listed Property Trusts (LPTs). Importantly, an investigation on the downside beta, particularly in LPTs, is crucial with respect to extensive studies have confirmed that LPTs should be viewed as a different asset class where LPTs are distinguishable from shares and direct property. In addition, the proliferation of the LPT market in Australia, as well as other markets around the world has further highlighted the importance of LPTs in the capital market. Therefore, this thesis explores the efficiency of using LPM-CAPM in Australian LPTs from return and risk perspectives over 1993-2005. The thesis finds strong evidence that both conventional beta and downside beta are empirically distinguishable. Additionally, both betas have different determinants where downside beta is strongly correlated with short term gearing and management structure; while no similar evidence is evident for conventional beta. Moreover, downside beta outperforms traditional beta in which it provides significantly greater explanatory power to the cross-sectional Australian LPT returns. Interestingly, no similar significance result is available for upside beta. These indicate that investors only require risk premium or compensation for high downside risk. Besides, the cross-sectional return analysis also confirms that book-to-market ratio and momentum effects have strong explanatory power to LPT returns. Furthermore, momentum strategy is also further demonstrated that it is not only the factor that can be used to explain returns, but also a profitable investment strategy in Australian LPTs. Most importantly, the survey of Australian property fund managers confirms that the significance of downside beta is consistent with how property investors individually perceive risk, although they do not accept and employ it as a preferable risk measure