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The Variation of Economic Risk Premiums in Real Estate Returns

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  • Karolyi, G Andrew
  • Sanders, Anthony B

Abstract

We examine the predictable components of returns on stocks, bonds, and real estate investment trusts (REITs). We employ a multiple-beta asset pricing model and find that there are varying degrees of predictability among stocks, bonds, and REITs. Furthermore, we find that most of the predictability of returns is associated with the economic variables employed in the asset pricing model. The stock market risk premium is highly important in capturing the predictable variation in stock portfolios, and the bond market risk premiums (term and risk structure of interest rates) are important in capturing the predictable variation in bond portfolios. For REITs, however, both the stock and bond market risk premiums capture the predictable variation in returns. REITs have comparable return predictability to stock portfolios. We conclude that there is an important economic risk premium for REITs that are not captured by traditional multiple-beta asset pricing models. Copyright 1998 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Real Estate Finance & Economics.

Volume (Year): 17 (1998)
Issue (Month): 3 (November)
Pages: 245-62

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Handle: RePEc:kap:jrefec:v:17:y:1998:i:3:p:245-62

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Web page: http://www.springerlink.com/link.asp?id=102945

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Cited by:
  1. Camilo Serrano & Martin Hoesli, 2012. "Fractional Cointegration Analysis of Securitized Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 44(3), pages 319-338, April.
  2. Ewing, Bradley T. & Payne, James E., 2005. "The response of real estate investment trust returns to macroeconomic shocks," Journal of Business Research, Elsevier, vol. 58(3), pages 293-300, March.
  3. James Payne, 2003. "Shocks to macroeconomic state variables and the risk premium of REITs," Applied Economics Letters, Taylor & Francis Journals, vol. 10(11), pages 671-677.
  4. Ming-Chi Chen & Chi-Lu Peng & So-De Shyu & Jhih-Hong Zeng, 2012. "Market States and the Effect on Equity REIT Returns due to Changes in Monetary Policy Stance," The Journal of Real Estate Finance and Economics, Springer, vol. 45(2), pages 364-382, August.
  5. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2009. "Time and Risk Diversification in Real Estate Investments: Assessing the Ex Post Economic Value," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(3), pages 341-381.
  6. Hoesli, Martin & Oikarinen, Elias, 2012. "Are REITs real estate? Evidence from international sector level data," Journal of International Money and Finance, Elsevier, vol. 31(7), pages 1823-1850.
  7. David Feldman & Shulamith Gross, 2005. "Mortgage Default: Classification Trees Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 30(4), pages 369-396, June.
  8. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2010. "1/N and long run optimal portfolios: results for mixed asset menus," Working Papers 2010-003, Federal Reserve Bank of St. Louis.
  9. Cheng Wee Tan & Dogan Tirtiroglu & Ercan Tirtiroglu, 2013. "Reits' Growth Options and Asset Pricing Dynamics across Time," Koç University-TUSIAD Economic Research Forum Working Papers 1303, Koc University-TUSIAD Economic Research Forum.
  10. Tracey West & Andrew C. Worthington, 2003. "Macroeconomic risk factors in Australian commercial real estate, listed property trust and property sector stock returns: A comparative analysis using GARCH-M," School of Economics and Finance Discussion Papers and Working Papers Series 160, School of Economics and Finance, Queensland University of Technology.
  11. Tien Foo Sing, 2004. "Common risk factors and risk premia in direct and securitized real estate markets," Journal of Property Research, Taylor & Francis Journals, vol. 21(3), pages 189-207, December.
  12. Dirk Brounen & Piet Eichholtz & David Ling, 2007. "Trading Intensity and Real Estate Performance," The Journal of Real Estate Finance and Economics, Springer, vol. 35(4), pages 449-474, November.
  13. Chen, Shyh-Wei & Shen, Chung-Hua, 2012. "Examining the stochastic behavior of REIT returns: Evidence from the regime switching approach," Economic Modelling, Elsevier, vol. 29(2), pages 291-298.
  14. Massimo Guidolin & Francesco Ravazzolo & Andrea Donato Tortora, 2011. "Myths and facts about the alleged over-pricing of U.S. real estate. Evidence from multi-factor asset pricing models of REIT returns," Working Paper 2011/19, Norges Bank.
  15. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2007. "Investing for the Long-run in European Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 35-80, January.
  16. John Gallo & Ying Zhang, 2010. "Global Property Market Diversification," The Journal of Real Estate Finance and Economics, Springer, vol. 41(4), pages 458-485, November.
  17. Kim Liow & Haishan Yang, 2005. "Long-Term Co-Memories and Short-Run Adjustment: Securitized Real Estate and Stock Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 31(3), pages 283-300, November.
  18. Guidolin, Massimo & Ravazzolo, Francesco & Tortora, Andrea Donato, 2013. "Alternative econometric implementations of multi-factor models of the U.S. financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 87-111.

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