Myths and Facts about the Alleged Over-Pricing of U.S. Real Estate. Evidence from Multi-Factor Asset Pricing Models of REIT Returns

Massimo Guidolin, Francesco Ravazzolo and Andrea Donato Tortora

No 416, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: This paper uses a multi-factor pricing model with time-varying risk exposures and premia to examine whether the 2003-2006 period has been characterized, as often claimed by a number of commentators and policymakers, by a substantial missprcing of publicly traded real estate assets (REITs). The estimation approach relies on Bayesian methods to model the latent process followed by risk exposures and idiosynchratic volatility. Our application to monthly, 1979-2009 U.S. data for stock, bond, and REIT returns shows that both market and real consumption growth risks are priced throughout the sample by the cross-section of asset returns. There is weak evidence at best of structural misspricing of REIT valuations during the 2003-2006 sample. Key words: REIT returns, Bayesian estimation, Structural instability, Stochastic volatility, Linear factor models. JEL codes: G11, C53.

Date: 2011
New Economics Papers: this item is included in nep-bec and nep-cis
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Working Paper: Myths and facts about the alleged over-pricing of U.S. real estate. Evidence from multi-factor asset pricing models of REIT returns (2011)
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