Exploring and Quantifying Unsystematic Risk in US Hotel REITs

Primary Author: Hongwei Zhao

Faculty Sponsor: Ming-Hsiang Chen


Primary College/Unit: Carson College of Business

Category: Business, Communication, and Politial Sciences

Campus: Pullman




Principal topic:

Although Real Estate Investment Trusts (REITs) were originally conceptualized as mechanisms for individual investors to participate in institutional real estate, the ownership of REIT stocks has recently become dominated by institutional investors. Meanwhile, the hybrid nature of REITs is problematic for investors, particularly less diversified, individual investors who cannot mitigate unsystematic risk. This study included three sections intended to deconstruct unsystematic risk and enable investors to make more informed decisions in their investment portfolios.


Section one investigated unsystematic risk by selecting all publicly-traded company daily returns from January 2001 to December 2018 and running Fama-French model. Section two conducted a parallel analysis of unsystematic risk and institutional ownership. Section three investigated herding behavior in the Hotel REIT sector by parallel regression.


Hotel REIT stocks have experienced wide variations in unsystematic risk between 14% and 92.5%. The trend toward institutional ownership of stocks is shown to have a significant negative impact on the levels of unsystematic risk. The implications remain to be identified as to whether higher levels of institutional ownership improve management efficiency and account for more monitoring power, in which price reflects more information and contains less individual specific risk. The unsystematic risk from REIT market returns is significantly lower than the one from the entire market returns, supporting that herding behavior in the Hotel REIT sector might “systematize” a portion of the unsystematic risk. Tracking investor sentiment may be one of factors explaining unsystematic risk for Hotel REITs.