IDEAS home Printed from https://ideas.repec.org/a/jre/issued/v35n42013p393-406.html
   My bibliography  Save this article

The Equity Risk Premium Puzzle: A Resolution - The Case for Real Estate

Author

Listed:
  • Robert H. Edelstein

    (The University of California at Berkeley)

  • Konstantin Magin

    (The University of California at Berkeley)

Abstract

This paper examines an important topic about the performance of securitized real estate by estimating the expected equity risk premium for U.S. Real Estate Investment Trusts-REITs. The estimation of the expected risk premium has been a thorny issue that spans the intersection of real estate finance, corporate finance, taxation economics, and investor decision-making. By employing a novel methodology, explicitly incorporating REIT shareholders taxation for capital gains and ordinary income, the analysis demonstrates that the expected after-tax risk premiums for REITs generate and are consistent with a reasonable coefficient of relative risk aversion. This finding is contrary to much of the existing literature about the risk premium (the so called equity risk premium puzzle). In this study, employing a Capital Consumption Asset Pricing Model (CCAPM) with stochastic taxation, we are able to demonstrate that for a range of plausible stochastic tax burdens, the coeffcient of relative risk aversion for REIT shareholders is likely to fall within the interval of 4:3 - 6:3, values significantly lower than those reported in most prior studies for real estate and other asset markets.

Suggested Citation

  • Robert H. Edelstein & Konstantin Magin, 2013. "The Equity Risk Premium Puzzle: A Resolution - The Case for Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 35(4), pages 393-406.
    • Handle: RePEc:jre:issued:v:35:n:4:2013:p:393-406
    as

    Download full text from publisher

    File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol35n04/01.393_406.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Razo-De-Anda, Jorge Omar & Cruz-Aké, Salvador & Venegas-Martínez, Francisco, 2022. "¿Can the stock market boost economic growth? evidence from the Mexican real estate investment trust (REIT)," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 17(36), pages 9-32, Primer se.
    2. Masud Alam, 2021. "Time Varying Risk in U.S. Housing Sector and Real Estate Investment Trusts Equity Return," Papers 2107.10455, arXiv.org.
    3. Konstantin Magin, 2015. "Equity risk premium and insecure property rights," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 213-222, October.
    4. José María Codosero Rodas & José Cabezas Fernández & José Manuel Naranjo Gómez & Rui Alexandre Castanho, 2019. "Risk Premium Assessment for the Sustainable Valuation of Urban Development Land: Evidence from Spain," Sustainability, MDPI, vol. 11(15), pages 1-21, August.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jre:issued:v:35:n:4:2013:p:393-406. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: JRER Graduate Assistant/Webmaster (email available below). General contact details of provider: http://www.aresnet.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.