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Housing risk and return: Evidence from a housing asset-pricing model

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  • Karl Case
  • John Cotter
  • Stuart Gabriel

Abstract

This paper investigates the risk-return relationship in determination of housing asset pricing. In so doing, the paper evaluates behavioral hypotheses advanced by Case and Shiller (1988, 2002, 2009) in studies of boom and post-boom housing markets. The paper specifies and tests a multi-factor housing asset pricing model. In that model, we evaluate whether the market factor as well as other measures of risk, including idiosyncratic risk, momentum, and MSA size effects, have explanatory power for metropolitan-specific housing returns. Further, we test the robustness of the asset pricing results to inclusion of controls for socioeconomic variables commonly represented in the house price literature, including changes in employment, affordability, and foreclosure incidence. We find a sizable and statistically significant influence of the market factor on MSA house price returns. Moreover we show that market betas have varied substantially over time. Also, results are largely robust to the inclusion of other explanatory variables, including standard measures of risk and other housing market fundamentals. Additional tests of model validity using the Fama-MacBeth framework offer further strong support of a positive risk and return relationship in housing. Our findings are supportive of the application of a housing investment risk-return framework in explanation of variation in metro-area cross-section and time-series US house price returns. Further, results strongly corroborate Case-Shiller survey research indicating the importance of speculative forces in the determination of U.S. housing returns.

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Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 1103.5971.

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Date of creation: Mar 2011
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Handle: RePEc:arx:papers:1103.5971

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  1. Joseph Gyourko & Eduardo Morales & Charles Nathanson & Edward Glaeser, 2011. "Housing Dynamics," 2011 Meeting Papers 307, Society for Economic Dynamics.
  2. Stuart A. Gabriel & Joe P. Mattey & William L. Wascher, 1999. "House price differentials and dynamics: evidence from the Los Angeles and San Francisco metropolitan areas," Economic Review, Federal Reserve Bank of San Francisco, pages 3-22.
  3. Monika Piazzesi & Martin Schneider & Selale Tuzel, 2006. "Housing, Consumption, and Asset Pricing," NBER Working Papers 12036, National Bureau of Economic Research, Inc.
  4. Markus K Brunnermeier & Christian Julliard, 2006. "Money Illusion and Housing Frenzies," FMG Discussion Papers dp579, Financial Markets Group.
  5. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing high house prices: bubbles, fundamentals, and misperceptions," Staff Reports 218, Federal Reserve Bank of New York.
  6. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
  7. Hanno N. Lustig & Stijn G. Van Nieuwerburgh, 2005. "Housing Collateral, Consumption Insurance, and Risk Premia: An Empirical Perspective," Journal of Finance, American Finance Association, vol. 60(3), pages 1167-1219, 06.
  8. Case, Bradford & Quigley, John M, 1991. "The Dynamics of Real Estate Prices," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 50-58, February.
  9. Lehmann, Bruce N., 1990. "Residual risk revisited," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 71-97.
  10. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-52, September.
  11. Amit Goyal & Pedro Santa-Clara, 2003. "Idiosyncratic Risk Matters!," Journal of Finance, American Finance Association, vol. 58(3), pages 975-1008, 06.
  12. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
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  1. Assorted Links
    by Martin Ryan in Geary Behaviour Centre on 2010-04-05 19:32:00
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Cited by:
  1. John Cotter & Stuart Gabriel & Richard Roll, 2011. "Integration and Contagion in US Housing Markets," Papers 1110.4119, arXiv.org.
  2. John Cotter & Stuart Gabriel & Richard Roll, 2012. "Can Metropolitan Housing Risk be Diversified? A Cautionary Tale from the Recent Boom and Bust," Papers 1208.0371, arXiv.org.
  3. M.I. Dröes & H. Garretsen & W.J.J. Manshanden, 2012. "The Diversification Benefits of Free Trade in House Value," Working Papers 12-03, Utrecht School of Economics.

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