Real Estate Risk in Equity Returns

43 Pages Posted: 18 Feb 2009 Last revised: 15 Feb 2010

See all articles by Christian Funke

Christian Funke

Source For Alpha AG

Timo Gebken

Source For Alpha AG

Gaston Michel

Source For Alpha AG

Lutz Johanning

WHU - Otto Beisheim School of Management

Date Written: February 12, 2010

Abstract

In this paper, we investigate whether shocks to real estate markets constitute an important state variable in the context of the Intertemporal Capital Asset Pricing Model (ICAPM) and, hence, explain the cross-sectional variation in average returns of the 25 Fama-French portfolios sorted on size and book-to-market. We document that a real estate factor can explain much of the underlying risk inherent in the Fama-French size- and value-factors. In comparison to the Fama-French three-factor model, our alternative two-factor model including the real estate factor next to the market factor performs quite well in pricing the cross section of equity returns. Moreover, we provide evidence that the real estate factor is not captured by other sources of risk applied in the context of the ICAPM, such as shifts in credit market conditions and the stance of monetary policy, aggregate distress risk, and news related to future GDP growth.

Keywords: Asset Pricing, Real Estate, ICAPM

JEL Classification: G12

Suggested Citation

Funke, Christian and Gebken, Timo and Michel, Gaston and Johanning, Lutz, Real Estate Risk in Equity Returns (February 12, 2010). Available at SSRN: https://ssrn.com/abstract=1343911 or http://dx.doi.org/10.2139/ssrn.1343911

Christian Funke

Source For Alpha AG ( email )

Kugelgasse 2-4
St. Gallen, 9001
Switzerland
+41-71-5112179 (Phone)

HOME PAGE: http://www.source-for-alpha.ch

Timo Gebken

Source For Alpha AG ( email )

Hinterlauben 4
St. Gallen, 9000
Switzerland

Gaston Michel (Contact Author)

Source For Alpha AG ( email )

Hinterlauben 4
St. Gallen, 9000
Switzerland
+49-611-563561 (Phone)
+49-611-306061 (Fax)

Lutz Johanning

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49 261 6509 720 (Phone)

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