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Myths and Facts about the Alleged Over-Pricing of U.S. Real Estate. Evidence from Multi-Factor Asset Pricing Models of REIT Returns

Author

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  • Massimo Guidolin
  • Francesco Ravazzolo
  • Andrea Donato Tortora

Abstract

This paper uses a multi-factor pricing model with time-varying risk exposures and premia to examine whether the 2003-2006 period has been characterized, as often claimed by a number of commentators and policymakers, by a substantial missprcing of publicly traded real estate assets (REITs). The estimation approach relies on Bayesian methods to model the latent process followed by risk exposures and idiosynchratic volatility. Our application to monthly, 1979-2009 U.S. data for stock, bond, and REIT returns shows that both market and real consumption growth risks are priced throughout the sample by the cross-section of asset returns. There is weak evidence at best of structural misspricing of REIT valuations during the 2003-2006 sample. Key words: REIT returns, Bayesian estimation, Structural instability, Stochastic volatility, Linear factor models. JEL codes: G11, C53.

Suggested Citation

  • 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 Papers 416, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    • Handle: RePEc:igi:igierp:416
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    More about this item

    Keywords

    reit returns; bayesian estimation; structural instability; stochastic volatility; linear factor models. jel codes: g11; c53.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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