The Risk and Return Characteristics of Stock Market-Based Real Estate Indexes and Their Relation to Appraisal-Based Returns

Joseph Gyourko and Donald Keim ()

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: Despite its importance to our national wealth, real estate remains a relatively unstudied asset. A key reason for this is the perceived limitations of available return data. Most research in the area relies on the appraisal-based series such as the Frank Russell Company (FRC) index. This paper suggests that the stock market provides a ready source of transactions-based data. Many real estate researchers are skeptical of stock market data because the studies of real estate investment trusts (REITs) find that their returns are more correlated with the broader stock market than with other known real estate series. A typical conclusion is that traded real estate securities do not accurately reflect real estate values.

We argue that such conclusions are premature. We simulate the returns and risks of portfolios of different types of real estate firms using historical stock prices for the 1962-1988 period. We use the time series of the real estate portfolio returns to estimate the correlation structure of returns among real estate securities, common stocks, long-term Treasury bonds, and inflation. Estimation of factor models documents a particularly strong small stock component to traded real estate stock returns. We also find substantial heterogeneity in return patterns across different types of real estate firms. Finally, we demonstrate that our real estate portfolios are not unrelated to appraisal-based indexes. Lagged values of the real estate portfolio returns can predict returns on the FRC index.

References: Add references at CitEc
Citations: View citations in EconPapers (2)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: THE RISK AND RETURN CHARACTERISTICS OF STOCK MARKET-BASED REAL ESTATE INDEXES AND THEIR RELATION TO APPRAISAL- BASED RETURNS (1990)
Working Paper: The Risk and Return Characteristics of Stock Market-Based Real Estate Indexes and Their Relation to Appraisal-Based Returns
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fth:pennfi:5-90

Access Statistics for this paper

More papers in Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().