Conditional Asset Pricing In European Real Estate Capital Markets

The paper examines the pricing of real estate equities listed in European capital markets from 1983 to 2009. While US equity and listed real estate markets have been thoroughly examined using diverse pricing models, European real estate capital markets have not been scrutinized to a similar extend. The paper aims at filling this gap and provides out-of-sample evidence on the pricing of listed real estate companies. Due to the assumptions of normally distributed returns and increasing absolute risk aversion, the traditional CAPM is not appropriate for real estate asset pricing. Therefore, the paper seeks to develop a conditional asset pricing model for European listed real estate companies by examining HML, SMB and higher comoments in addition to the common market factor. The Fama & French factors are calculated for European stock markets and used to capture the cross-sectional variation in average property stock returns. Since non-normality is a common feature in real estate stock returns, the coskewness and cokurtosis are included in the asset pricing model. Furthermore, it accounts for a relationship between the risk factors and asset returns that is conditional on market phases. Therefore, the asset pricing test is performed conditional on whether the excess market return is positive or negative, assuming an inverse relationship in periods with negative excess market returns. The paper moreover scrutinizes whether the inclusion of higher comoments into the Fama & French Three-Factor model increases the explanatory power or whether the additional risk factors proxy for HML or SMB.