Independent Study - Long Honors Project
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Independent Study - Long Honors Project
Market Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors P Independent Study - Long Honors ProjectProgram in the Department of Economics and Finance.Examining Committee:Dr. Robert BurrusDr. Christopher DumasDr. William AtwillApproved By:Dr. Edward Graham Faculty SupervisorDepartment ChairHonors Council RepresentativeDirector of the Honors Scholars ProgramThe University of North Carolina at Wilmi Independent Study - Long Honors ProjectngtonWilmington, North Carolina380782Market Efficiency and Real Estate Investment TrustsAbstractAn efficient market is one in which prices quickly refIndependent Study - Long Honors Project
lect information relevant to the goods or services traded in that market. Few markets are efficient; securities markets in the United States are relatMarket Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors P Independent Study - Long Honors Projects that considers the efficiency of securities markets; a much narrower literature considers the relative inefficiency of the real estate market. Only a modest volume of research contrasts the efficiency of securities and real estate markets; that research is supplemented with this study. Real Estate Independent Study - Long Honors Project Investment Trusts or REIT’s, provide a unique link between the securities and real estate markets. A REIT is traded in the same fashion as a publiclyIndependent Study - Long Honors Project
-traded stockholder-owned company, but enjoys special tax treatment and has accounting requirements peculiar to the real estate industry. A REIT shareMarket Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors P Independent Study - Long Honors Project the REIT share “enjoys” some of the same efficiencies as the stock market, while directly representing ownership in real estate, a far less efficient market. These relationships, and publicly-traded REIT companies, are considered at length in this study.3Acknowledgements1 would like to give credit Independent Study - Long Honors Projectto a number of people and institutions for helping me in my study. First OÍ dll, I would like to like Dr. Edward Graham from the Economics and FinanceIndependent Study - Long Honors Project
department of the Cameron School of Business (CSB). He was my faculty supervisor and mentor for this project. He spent numerous hours of Iris past twMarket Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors P Independent Study - Long Honors Project direction throughout the entire study. Without his help I feel I would never have been able to accomplish what I did.Among the other people I would like to thank include Gene Houghtaling from the CSB. Once Morningstar’s Principia product was obtained he was an invaluable resource for accessing the Independent Study - Long Honors Projectdata and installing it in the computer lab in Cameron Hall. My thanks also go out to Dr. Burrus, Dr. Dumas, and Dr. Atwill for being a pan of the reviIndependent Study - Long Honors Project
ewing committee for my thesis.A number of institutions also helped make this project a success. I need to thank the research film, Morningstar, for thMarket Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors P Independent Study - Long Honors Projectncc Department for use of their computer lab and die help 1 received from the many professors. T^isl ol all, I would like to thank the Honors Scholars Program. Because of this program. 1 have had this opportunity to differentiate myself as a student through this project, l he skills and experience 1 Independent Study - Long Honors Project have gained from this project will serve me well as I transition towards a career in business, and as I consider my options for graduate study.4ChaptIndependent Study - Long Honors Project
er 1Market Efficiency and Real Estate Investment Trusts1.1 Introduction and MotivationThe efficiency of the capital and real estate markets are considMarket Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors P Independent Study - Long Honors Projectnd real estate market efficiency help to highlight possible inefficiencies in the real estate market. In the real estate market, consideration will be given especially to the REIT (Real Estate Investment Trust) sector and the efficiency of that component of the real estate market.The efficient marke Independent Study - Long Honors Projectt hypothesis holds that market prices fully reflect all available and relevant information, and that it is typically unprofitable for investors to tryIndependent Study - Long Honors Project
to “beat the market.” This is intuitive: If all traders in a given market have access to the same set of information, and no onerous “frictions" (higMarket Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors P Independent Study - Long Honors Projecttion, then trading profits are theoretically eliminated with the first few trades after the arrival of “new” information. One can quickly envision rhe securities markets being relatively efficient (with stock prices quickly responding to news of great earnings or the arrest of the firm’s chief execu Independent Study - Long Honors Projecttive) and the real estate market being far less efficient. Real estate just does not “trade” in the same fashion as shares of Slock.The semi-strong foIndependent Study - Long Honors Project
rm of this theory holds true in the capital markets, particularly the US equity market. The semi-strong form of this theory suggests that prices refleMarket Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors P Independent Study - Long Honors Projectes not. by legal mandate, hold.5 Il is generally againsi securities laws for individuals (0 trade based on (heir private information, and thus that information is not typically “imbedded" in securities prices. The rapid and dramatic response of stock prices to new and significant news is strong evid Independent Study - Long Honors Projectence both that the strong form does not hold and that investors, despite the jaded remarks of the popular press, generally do not trade on inside infoIndependent Study - Long Honors Project
rmation.In the real estate market, conditions are less “perfect," than in the capital markets. A perfect market is one where there are no costly “fricMarket Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors P Independent Study - Long Honors Project and a limited number of buyers and sellers. Real estate itself is broadly considered an inefficient and imperfect market, with prices being required to overcome copious and costly frictions. The introduction of REIT’s - a securitized ownership form for real estate - was designed in part to overcome Independent Study - Long Honors Project these inefficiencies and imperfections. Given the greater costliness to a buyer or seller delivering good or bad information to the market with his rIndependent Study - Long Honors Project
eal estate trade, trades often do not take place, and prices do not reflect “available and relevant” infoimation. For example, it may be attractive toMarket Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors P Independent Study - Long Honors Projectte.Market Efficiency and Real Estate Investment TrustsByJonathan Matthew LongA paper submitted in partial Íulfilhnent of the requirements of the Honors PGọi ngay
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