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

45 Pages Posted: 24 Apr 2013

See all articles by Francesco Ravazzolo

Francesco Ravazzolo

Free University of Bolzano

Massimo Guidolin

Bocconi University - Department of Finance

Andrea Donato Tortora

Bocconi University

Multiple version iconThere are 2 versions of this paper

Date Written: December 31, 2011

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 mispricing 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 mispricing of REIT valuations during the 2003-2006 sample.

Keywords: REIT returns, Bayesian estimation, Structural instability, Stochastic volatility, Linear factor models

JEL Classification: G11, C53

Suggested Citation

Ravazzolo, Francesco and Guidolin, Massimo and Tortora, Andrea Donato, Myths and Facts About the Alleged Over-Pricing of U.S. Real Estate. Evidence from Multi-Factor Asset Pricing Models of REIT Returns (December 31, 2011). Available at SSRN: https://ssrn.com/abstract=2255943 or http://dx.doi.org/10.2139/ssrn.2255943

Francesco Ravazzolo (Contact Author)

Free University of Bolzano ( email )

Bolzano
Italy

Massimo Guidolin

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Andrea Donato Tortora

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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