Leverage, Volatility, and Returns: A Cross-Country Analysis of Public Real Estate Markets

The theoretical literature suggests a significant positive relation between financial leverage and both volatility and returns. However, the empirical evidence on the effects of leverage on public stock returns and volatility are mixed. We propose to examine leverage effects in public real estate market returns and volatility across the 10-15 countries with the most active public real estate markets. Cross-country public real estate markets provide a unique testing ground given the significant use of leverage in real estate markets, the cross-section of REIT structures and real estate firms within and across countries, and the cross country differences in liquidity, ownership, economic, institutional, legal and capital market structures. In our preliminary results using U.S. public real estate markets, we carefully isolate leverage effects in firm-level returns and find that leverage has a significant effect on returns and volatility both unconditionally and conditionally using standard asset pricing and GARCH volatility models. We hypothesize that the across country evidence on leverage effects in public real estate markets are likely to be significant and to vary with differences in liquidity, ownership, economic, institutional, legal and capital market structures