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The diverging role of the systematic risk factors: evidence from real estate stock markets

Author

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  • Stephan Lang
  • Alexander Scholz

Abstract

Purpose - – The risk-return relationship of real estate equities is of particular interest for investors, practitioners and researchers. The purpose of this paper is to examine, in an asset pricing framework, whether the systematic risk factors play a significantly different role in explaining the returns of listed real estate companies, compared to general equities. Design/methodology/approach - – Running the difference test of the Fama-French three-factor and the liquidity-augmented asset pricing model, the authors analyze the effect of the systematic risk factors related to market, size, BE/ME and liquidity in a time-series setting over the period July 1992 to June 2012. By applying the propensity score matching (PSM) algorithm, the authors bypass the “curse of dimensionality” of traditional matching techniques and identify a comparable control sample of general equities, in terms of the relevant firm characteristics of size, BE/ME and liquidity. Findings - – The empirical results indicate that European real estate equity returns load significantly differently on the size, value and liquidity factor, while the influence of the market factor seems to be equivalent. In addition, the authors find an economically and statistically significant underperformance of European real estate equities, after accounting for the diverging role of systematic risk factors. Running the conditional time-series regression, the authors further reveal that these findings are predominately caused by the divergent risk-return behavior of real estate equities in economic downturns. Practical implications - – Due to the diverging role of the systematic risk factors in pricing real estate equities, the authors provide evidence of potential diversification benefits for investors and portfolio managers. Originality/value - – This is the first real estate asset pricing study to dissect the unique risk-return relationship of real estate equities by employing propensity score matching.

Suggested Citation

  • Stephan Lang & Alexander Scholz, 2015. "The diverging role of the systematic risk factors: evidence from real estate stock markets," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 33(1), pages 81-106, February.
    • Handle: RePEc:eme:jpifpp:v:33:y:2015:i:1:p:81-106
    DOI: 10.1108/JPIF-05-2014-0032
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    Citations

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    Cited by:

    1. Kola, Katlego & Kodongo, Odongo, 2017. "Macroeconomic risks and REITs returns: A comparative analysis," Research in International Business and Finance, Elsevier, vol. 42(C), pages 1228-1243.
    2. Philipp Bejol & Nicola Livingstone, 2018. "Revisiting currency swaps: hedging real estate investments in global city markets," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 36(2), pages 191-209, March.
    3. Vishaal Baulkaran & Pawan Jain & Mark Sunderman, 2019. "Housing “Beta”: Common Risk Factor in Returns of Stocks," The Journal of Real Estate Finance and Economics, Springer, vol. 58(3), pages 438-456, April.

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