Diversification and Market Volatility: Evidence from US REITs

This paper investigates whether the impact of geographic diversification on REIT value and risk premiums depends on market conditions. We find that the effect of diversification varies with market volatility. During periods of low and normal market volatility, geographically diversified REITs have lower value and higher equity and debt risk premiums than focused REITs. During periods of high market volatility, the value discount falls by over 60% and is no longer statistically significant. Notably, the discount disappears but does not reverse into a premium. At the same time, we find that the adverse effects of market volatility on REIT value and risk premiums are less pronounced for diversified REITs than for focused ones, indicating that geographic diversification serves as a buffer against market stress rather than as a source of additional value.