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

See all articles by Jacob S. Sagi

Jacob S. Sagi

University of North Carolina Kenan-Flagler Business School

Date Written: July 12, 2020

Abstract

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

Sagi, Jacob, Asset-Level Risk and Return in Real Estate Investments (July 12, 2020). Forthcoming in The Review of Financial Studies, Available at SSRN: https://ssrn.com/abstract=2596156 or http://dx.doi.org/10.2139/ssrn.2596156

Jacob Sagi (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/sagij/

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