The real estate risk premium: A developed/emerging country panel data analysis
AbstractThe objective of this paper is to identify the determinants of office capitalization rates for a panel of 52 countries (developed and emerging countries) between 2000 and 2006. Our assumption, based on a Capital Asset Pricing Model, is that the capitalization rate should be at least proportional to the country’s risk perception, as measured by the risk premium on the 10-year government bond yield. Because of the endogeneity of the latter variable, our empirical methodology requires that we estimate first a model explaining the 10-year bond yield. It will be the occasion to discuss the determinants of the risk premium on the bond market. Using a SURE random effect Hausman-Taylor estimator (Hausman & Taylor, 1981), we also take into account the possible correlation between the country risk characteristics on the bond markets and those that determine the real estate market. Our results show that government bond yield is the main determinant of the capitalization rate. We estimate that a 1 percentage point increase in the government bond yield will raise the capitalization rate by about 0.19 percentage point. Real estate variables play also a role, but to a lesser extent. Turning to determinants of the 10-year bond yield, macroeconomic fundamentals are significant determinants of the country risk premium, especially the capacity to honor short-term financial engagements. In addition, the country’s risk history has also very important effect on the investors’ current risk perception.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2008004.
Date of creation: 01 Jan 2008
Date of revision:
Contact details of provider:
Postal: Voie du Roman Pays 34, 1348 Louvain-la-Neuve (Belgium)
Fax: +32 10474304
Web page: http://www.uclouvain.be/core
More information through EDIRC
Find related papers by JEL classification:
- R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alain GILLIS).
If references are entirely missing, you can add them using this form.