Emanuela Giacomini

The role of investor sentiment in the real estate market

In neoclassical finance theory, there is no role for investor sentiment in valuation, markets are efficient and all movements in stock prices rationally reflect changes in cash flows or discount rates. In contrast, the behavioural finance literature posits that investor sentiment and limits to arbitrage play a role in the determination of asset prices which is independent of market fundamentals. REITs are unique in that the pricing of the asset class parallels two markets: real estate assets trade in the private market and REIT shares, which provide indirect ownership of underlying properties, trade in the public market. The aim of this research work is twofold. First, it provides a detailed analysis of the investor sentiment literature in the finance and real estate field, with a focus on the methodologies used to construct sentiment indices. Secondly, this analysis is one of the first attempts to investigate how REIT-specific characteristics are related to their sensitivity to investor sentiment (sentiment beta).