What Can Commercial Property Performance Reveal about Bank Valuations?
27 Pages Posted: 2 Dec 2020 Last revised: 22 Dec 2020
Date Written: December 1, 2020
We test whether commercial property performance, proxied by real estate investment trust (REIT) prices, can inform us about bank equity prices. Using data from the United States, the euro area and Japan, we show that REIT prices can predict bank equity prices. Furthermore, a “commercial property factor” adds significant explanatory power to both the CAPM and the 3-factor Fama-French model. At the same time, quantile regressions show that this factor becomes particularly prominent during downturns. It accounts for around half of the drop in average bank valuations during the great financial crisis and, again, during the COVID-19 pandemic.
Keywords: asset prices, banks, commercial property, financial stability, real estate
JEL Classification: E44, G12, G21
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