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REIT idiosyncratic risk

Investors are told to hold a well‐diversified portfolio; when everyone does so, idiosyncratic risk is diversified away and does not enter the pricing equation in equilibrium. This study finds that the idiosyncratic risk of real estate investment trusts (REITs) appears to have an upward time trend during the vintage REIT era (1980–1992) and appears to trend downward during the new REIT era (1993–2006). This study also finds that this pattern appears to coincide with a reversion in the relation between REIT idiosyncratic risk and the excess returns of REITs. Specifically, during the vintage REIT era, the excess return of REITs is positively related to REIT idiosyncratic risk. After 1993, the excess return of REITs is negatively related to REIT idiosyncratic risk.