Leverage risk and REIT returns

The aim of this study is to analyze the role played by leverage, introduced as a risk factor, on the dynamics of U.S. REIT sectors returns. Using CRSP/Ziman series and Compustat data bases, we build two leverage risk factors and test their contribution in linear conditional asset pricing models. Our robust results report that leverage risk factors are significantly priced, shedding new light on strategic and tactical securitized real estate investments. • We analyze the role of leverage, as a common risk factor, on U.S. REIT returns. • We compute and introduce two metrics (LTV and DER) for a leverage risk factor. • We develop and test parsimonious conditional asset pricing models. • The leverage risk factors are highly statistically significant for REITs.