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Dissecting the 2007–2009 Real Estate Market Bust: Systematic Pricing Correction or Just a Housing Fad?

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  • Daniele Bianchi
  • Massimo Guidolin
  • Francesco Ravazzolo

Abstract

We use a flexible Bayesian model averaging method to estimate a factor pricing model characterized by structural uncertainty and instability in macro-financial factor loadings and idiosyncratic risks. We propose such a framework to investigate key differences in the pricing mechanism that applies to residential versus non-residential real estate investment trusts (REITs). An analysis of cross-sectional mispricings reveals no evidence of pure housing/residential real-estate abnormal returns inflating between 1999 and 2007, to subsequently collapse. In fact, all REITs sectors record increasing alphas during this period, and show important differences in the dynamic evolution of risk factors exposures.

Suggested Citation

  • Daniele Bianchi & Massimo Guidolin & Francesco Ravazzolo, 2018. "Dissecting the 2007–2009 Real Estate Market Bust: Systematic Pricing Correction or Just a Housing Fad?," Journal of Financial Econometrics, Oxford University Press, vol. 16(1), pages 34-62.
    • Handle: RePEc:oup:jfinec:v:16:y:2018:i:1:p:34-62.
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    More about this item

    Keywords

    Bayesian econometrics; I-CAPM; mispricing; model uncertainty; REIT; stochastic breaks;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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