Market Efficiency of US REITs: A Revisit

The findings on the efficient market hypothesis in the US real estate investment trust (REIT) sector are mixed, and applied methodologies may not be adequate. This paper investigates the weak-form efficient market hypothesis for US REIT stocks. The variance ratio test indicates that the REIT and general stock markets are not efficient in the weak-form. However, the log price series for REIT stocks violates the random walk theory as a model specification. As an alternative, we applied the quantum harmonic oscillator to provide robust evidence. The quantum harmonic oscillator, including the solution for a random walk as a ground state solution, proved to be a better method for testing the efficient market hypothesis. Contrary to variance ratio test, quantum harmonic oscillator provides results that REIT stocks are more efficient than general stocks, and their market efficiency is close to that of bonds. We argue that large market size and substantial institutional ownership of REIT shares have enhanced market efficiency. The findings suggest that arbitrage in the REIT market cannot be achieved simply by analyzing the historical price trend.