Asset Pricing, Spatial Linkages and Contagion in Real Estate Stocks

42 Pages Posted: 30 Sep 2016 Last revised: 31 Aug 2017

See all articles by Stanimira Milcheva

Stanimira Milcheva

University College London

Bing Zhu

University of Reading - Henley Business School

Date Written: September 27, 2016


Although spatial techniques have been used to capture the spillovers in asset returns across different regions, they have not yet been applied in an asset pricing context. Combining asset pricing models and equilibrium spatial models can be a good way to disentangle spillover effects across assets thereby accounting for systemic risks. We use an innovative approach and estimate a four-factor ‘Spatial’ Capital Asset Pricing Model (SCAPM) which allows us to account for correlations in the error terms. We can account for direct or indirect spillover effects in the presence of increased spillovers through the idiosyncratic component or of increased spillovers through the market respectively. We find that contagion dramatically increases during the global financial crisis and the spillover effect can explain up to 40% of total asset variation. In the rest of the time, idiosyncratic risks have been the predominant type of risk in real estate stocks. Our results have implications for investors showing that the market can channel asset volatility leading to contagion during crisis periods and therefore residual linkages between country indices need to be accounted for as a means of assessing the diversification benefits of a global portfolio.

Keywords: Spatial CAPM, Systemic Risk, Idiosyncratic Risk, Contagion, Spillovers, Listed Property Returns, Economic Integration

JEL Classification: C23, G15, F36, R3

Suggested Citation

Milcheva, Stanimira and Zhu, Bing, Asset Pricing, Spatial Linkages and Contagion in Real Estate Stocks (September 27, 2016). Available at SSRN: or

Stanimira Milcheva (Contact Author)

University College London ( email )

1-19 Torrington Place
Bartlett School of Sustainable Construction
London, London WC1E 7HB
United Kingdom


Bing Zhu

University of Reading - Henley Business School ( email )

Henley, RG9 3AU
United Kingdom

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