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


  • Robert H. Edelstein

    () (The University of California at Berkeley)

  • Konstantin Magin

    () (The University of California at Berkeley)


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

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    JEL classification:

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


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