Expected idiosyncratic moment risk and the cross-section of REIT returns

In this paper, we investigate whether expected idiosyncratic volatility (IV) and expected idiosyncratic skewness (IS) risk are both present and significant in the cross-section of expected REIT returns. Our firm-level empirical tests indicate a significant and negative relationship between REIT returns and both IV and IS risk. The observed risk-return trade-off remains significant even after controlling for firm-level characteristics and common risk factors. The empirical results document that firm-level IS risk is consonant with firm-level IV and that IS risk is not subsumed by IV and vice versa. Using Hou and Loh’s (2016) cross-sectional decomposition analysis, we find that firm-level IV and IS capture a very small percentage of each other’s average return premium, while a residual component accounts for the rest.