Asset-Level Risk and Return in Real Estate Investments
Forthcoming in The Review of Financial Studies
57 Pages Posted: 20 Apr 2015 Last revised: 2 Oct 2020
Date Written: July 12, 2020
In stark contrast with liquid asset returns, I find that commercial real estate idiosyncratic return means and variances do not scale with the holding period, even after accounting for all cash flow relevant events. This puzzling phenomenon survives controlling for vintage effects, systematic risk heterogeneity, and a host of other explanations. To explain the findings, I derive an equilibrium search-based asset-pricing model which, when calibrated, provides an excellent fit to transactions data. A structural model of transaction risk seems crucial to understanding real estate price dynamics. These insights extend to other highly illiquid asset classes, such as private equity and residential real estate.
Keywords: Real estate, illiquid assets, holding period returns, search, idiosyncratic risk, transaction risk.
JEL Classification: G12
Suggested Citation: Suggested Citation