A Dynamic Analysis of Land Prices

Abstract

A dynamic model of land prices is developed. It derives arbitrage asset prices under nonadditive dynamic preferences, risk aversion, and transaction costs. The model nests as special cases risk neutrality, time‐additive preferences, the static capital asset pricing model (CAPM), as well as the dynamic consumption‐based CAPM. The model is applied to the analysis of U.S. land prices for the period 1950–96. The econometric results provide evidence showing that U.S. land price patterns are inconsistent with risk neutrality or with the static CAPM model. No strong evidence was found against time‐additive preferences. The econometric findings indicate that both risk aversion and transaction costs have significant effects on land prices.

Keywords: asset pricing, land, risk, transaction cost, Q150