A Study of the Returns Behavior of Small Capitalization REITs

We analyze the daily returns on 63 real estate investment trusts (REITs) that comprise five US Small Cap REIT indices, and test for weak-form efficiency by estimating the Hurst exponent and fractal dimension. Fourteen of the 63 firms (or roughly 22% of the firms studied) fail to exhibit weak-form efficiency, based on Classical Rescaled Range Analysis. Two additional self-affine fractal analysis techniques (Roughness-Length and Variogram analyses) provide some support for this finding. In particular, it is found that a majority of the series for which weak-form efficiency is rejected are anti-persistent, with estimated Hurst exponents below 0.50.These results are further confirmed by Lo’s (1991) modified rescaled range analysis, which reveals significant memory at long lags. Overall, the results suggest inefficient pricing for a significant subset of REITs, with important implications for trading and for the modeling of REIT returns. .Some aspects of their returns behavior warrant further study