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Returns and Information Transmission Dynamics in Public and Private Real Estate Markets

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  • David C. Ling
  • Andy Naranjo

Abstract

type="main"> This paper examines U.S. public and private commercial real estate returns at the aggregate level and by the four major property types over the 1994–2012 time period. Returns are carefully adjusted for differences between public and private markets in financial leverage, property type focus and management fees. Unconditionally, we find that passive portfolios of unlevered core real estate investment trusts (REITs) outperformed their private market benchmark by 49 basis points (annualized) over the 1994–2012 sample period. Our baseline vector autoregression results suggest that REIT returns do not embed additional commercial real-estate-specific information useful in predicting private market returns. These results strongly suggest that equity REIT returns react to fundamental (latent) asset pricing information more quickly than private market returns given their greater liquidity and price revelation. REITs therefore serve as a fundamental information transmission channel to private market returns when asset pricing variables are omitted.

Suggested Citation

  • David C. Ling & Andy Naranjo, 2015. "Returns and Information Transmission Dynamics in Public and Private Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(1), pages 163-208, March.
  • Handle: RePEc:bla:reesec:v:43:y:2015:i:1:p:163-208
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    File URL: http://hdl.handle.net/10.1111/1540-6229.12069
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    References listed on IDEAS

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    Cited by:

    1. Brent W. Ambrose & Brad Case & Seow Eng Ong, 2015. "Introduction to the Special Issue," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(1), pages 1-7, March.
    2. repec:kap:jrefec:v:56:y:2018:i:3:d:10.1007_s11146-017-9646-8 is not listed on IDEAS
    3. Kishor, N. Kundan, 2017. "Understanding the Relationship between Public and Private Commercial Real Estate Markets," MPRA Paper 83475, University Library of Munich, Germany.
    4. Stefan Nagel & Amiyatosh Purnanandam, 2019. "Bank Risk Dynamics and Distance to Default," NBER Working Papers 25807, National Bureau of Economic Research, Inc.
    5. Massimo Guidolin & Manuela Pedio & Milena Petrova, 2019. "The Predictability of Real Estate Excess Returns: An Out-of-Sample Economic Value Analysis," BAFFI CAREFIN Working Papers 19122, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    6. repec:bla:acctfi:v:58:y:2018:i:s1:p:311-342 is not listed on IDEAS
    7. Viktoriya Lantushenko & Edward Nelling, 2017. "Institutional Property-Type Herding in Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, vol. 54(4), pages 459-481, May.
    8. repec:bla:abacus:v:53:y:2017:i:3:p:395-430 is not listed on IDEAS
    9. repec:bla:reesec:v:46:y:2018:i:1:p:210-250 is not listed on IDEAS
    10. Qiulin Ke & Karen Sieracki, 2018. "Exploring sentiment-driven trading behavior of different types of investors in London office market," ERES eres2018_112, European Real Estate Society (ERES).
    11. repec:kap:jrefec:v:57:y:2018:i:1:d:10.1007_s11146-016-9562-3 is not listed on IDEAS

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