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Real Estate Returns and the Macroeconomy: Some Empirical Evidence from Real Estate Investment Trust

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Abstract

This paper explores the relationship between the macroeconomy and real estate returns. Equity REIT data are used as a proxy for real estate returns; however, the equity REIT returns are regressed against returns from the Standard and Poor's 500 Stock Index, saving the residuals. These residuals, known as extra-market covariance, are used in the analysis since this technique controls for the covariance between equity REIT returns and the overall stock market. Thus, the residuals represent pure industry effects. The residuals are then employed in an unrestricted vector autoregressive model with the macroeconomic variables to test for relationships. The results show that prices, nominal rates, output, and investment all directly influence the real estate series. Nominal interest rates, moreover, explain the majority of the variation in the real estate series.

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  • Thomas E. McCue & John L. Kling, 1994. "Real Estate Returns and the Macroeconomy: Some Empirical Evidence from Real Estate Investment Trust," Journal of Real Estate Research, American Real Estate Society, vol. 9(3), pages 277-288.
  • Handle: RePEc:jre:issued:v:9:n:3:1994:p:277-288
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    1. Terry V. Grissom & David Hartzell & Crocker H. Liu, 1987. "An Approach to Industrial Real Estate Market Segmentation and Valuation Using the Arbitrage Pricing Paradigm," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(3), pages 199-219.
    2. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    3. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    4. Hoag, James W, 1980. " Towards Indices of Real Estate Value and Return," Journal of Finance, American Finance Association, vol. 35(2), pages 569-580, May.
    5. Rosenberg, Barr, 1974. "Extra-Market Components of Covariance in Security Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(02), pages 263-274, March.
    6. John S. Hekman, 1985. "Rental Price Adjustment and Investment in the Office Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(1), pages 32-47.
    7. John L. Kling & Thomas E. McCue, 1991. "Stylized Facts About Industrial Property Construction," Journal of Real Estate Research, American Real Estate Society, vol. 6(3), pages 293-304.
    8. Leo Grebler & Leland S. Burns, 1982. "Construction Cycles in the United States Since World War II," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 10(2), pages 123-151.
    9. David Hartzell & John S. Hekman & Mike E. Miles, 1987. "Real Estate Returns and Inflation," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(1), pages 617-637.
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    JEL classification:

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

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