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Asset Pricing Model with Short-Sale Restrictions: The Case of Asian Property Markets

  • Tsong-Yue Lai

    ()

    (Department of Finance, California State University, Fullerton, CA 92634,USA)

  • Hin Man Mak

    ()

    (Department of Applied Mathematics, Hong Kong Polytechnic University, Hunghom, Kowloon, Hong Kong)

  • Ko Wang

    ()

    (Chinese University of Hong Kong, Shatin, Hong Kong and Professor of Real Estate, Department of Finance, California State University, Fullerton, CA 92634, USA)

Registered author(s):

Asset pricing models have been used extensively in the recent real estate literature to evaluate real estate performance and estimate required rates of return of properties. In this paper, we show that the CAPM and its variants will derive a biased result when short sales are not allowed in the market. This problem is particularly serious for Asian property markets where investors are not able to short sell real estate indexes as a substitute for short selling real properties. We also demonstrate that the bias resulting from the short-sale constraint is related to the supply-and-demand conditions in the local market.

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Article provided by Asian Real Estate Society in its journal International Real Estate Review.

Volume (Year): 4 (2001)
Issue (Month): 1 ()
Pages: 43-56

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Handle: RePEc:ire:issued:v:04:n:01:2001:p:43-56
Contact details of provider: Postal: Asia Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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  1. Jack H. Rubens & Michael T. Bond & James R. Webb, 1989. "The Inflation-Hedging Effectiveness of Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 4(2), pages 45-56.
  2. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
  3. Fama, Eugene F, 1976. "Inflation Uncertainty and Expected Returns on Treasury Bills," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 427-48, June.
  4. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June.
  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  6. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
  7. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
  8. K.C. Chen & Daniel D. Tzang, 1988. "Interest-Rate Sensitivity of Real Estate Investment Trusts," Journal of Real Estate Research, American Real Estate Society, vol. 3(3), pages 13-22.
  9. Hoesli, M. & Macgregor, B. & Matysiak, G. & Nanthakumaran, N., 1996. "The Short Term Inflation Hedging Characteristics of UK Real Estate," Papers 96.15, Ecole des Hautes Etudes Commerciales, Universite de Geneve-.
  10. Nelson, Charles R & Schwert, G William, 1977. "Short-Term Interest Rates as Predictors of Inflation: On Testing the Hypothesis That the Real Rate of Interest is Constant," American Economic Review, American Economic Association, vol. 67(3), pages 478-86, June.
  11. Fama, Eugene F. & Gibbons, Michael R., 1984. "A comparison of inflation forecasts," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 327-348, May.
  12. Crocker H. Liu & David J. Hartzell & Martin E. Hoesli, 1997. "International Evidence on Real Estate Securities as an Inflation Hedge," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(2), pages 193-221.
  13. Fama, Eugene F, 1977. "Interest Rates and Inflation: The Message in the Entrails," American Economic Review, American Economic Association, vol. 67(3), pages 487-96, June.
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