Intra-industry momentum: the case of REITs

Real estate investment trusts (REITs) provide a good setting to examine intra-industry momentum. The industry is relatively homogenous and well defined, and the industry experienced structural changes that allow us to test alternative explanations for the observed momentum effect. Specifically, we test predictions that are related to investor overconfidence (based on Daniel, Hirshleifer, and Subrahmanyam (1998)) and the speed of information diffusion (based on Hong and Stein (1999)). The first predicts a stronger momentum effect in REITs during the post-1990 period than during the pre-1990 period due to more valuation uncertainty in the post-1990 period. The second predicts a more pronounced momentum effect in REITs during the pre- 1990 period than during the post- 1990 period due to the higher speed of information diffusion in the post-1990 period. Our findings tend to support the first prediction. Specifically, while we do not find a momentum effect in REITs during the pre- 1990 period, we find a strong and prevalent momentum effect in REITs during the post-1990 period. (C) 2003 Elsevier Science B.V. All rights reserved.