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Risk and Return of German Real Estate Stocks: A Simulation Approach with Geometric Brownian Motion

Author

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  • Felix Brandt
  • Carsten Lausberg

Abstract

This paper explores the stock returns of German real estate companies from 1991 to 2019. In contrast to previous studies we use a forward-looking approach and alternative risk measures to better reflect investor behavior. At first the paper constructs a traditional five-factor Arbitrage Pricing Theory model to measure the sensitivity of real estate stock returns to the stock, bond and real estate markets as well as to inflation and the overall economic development. The analysis shows that German real estate stocks are more impacted by changes in the economy and the stock market than by changes in the real estate market. We then apply a pseudo ge-ometric Brownian motion concept combined with a Monte Carlo simulation to model future asset prices. Value at risk and conditional value at risk are used to quantify the downside risk for an investor in listed real estate. The paper finds that listed real estate is less risky than the general stock market, which is in line with our expectations.

Suggested Citation

  • Felix Brandt & Carsten Lausberg, 2021. "Risk and Return of German Real Estate Stocks: A Simulation Approach with Geometric Brownian Motion," ERES eres2021_86, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2021_86
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    More about this item

    Keywords

    Asset Pricing; Germany; Monte Carlo Simulation; real estate;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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