The Time-Varying Link of Public Timber REITs with Private Timberland, Real Estate, and Financial Assets

Abstract

Abstract We examined the relationship between public timber real estate investment trusts (REIT), private timberland, real estate, and financial asset returns using a multi-factor model and investigated the time-varying volatility of timber REITs under the state space framework. We first orthogonalized explanatory variables to obtain pure factors. Then we decomposed REIT volatility into S&P500, private-equity timberland, real estate, bond, and idiosyncratic risk components. Results reveal that timber REITs are positively sensitive to large-cap stocks and bonds. Volatility contributions of the large-cap stock factor are consistent and high whereas those of idiosyncratic risk factors decline over time. Private-equity timberland, real estate, and bonds exhibit negligible contribution to the volatility of timber REITs. We conclude that timber REIT characteristics change with time and the timber REIT market is not mature. Thus, the results contribute to our understanding of the risk and return features of public-equity timberland investments.