Norges Bank

Working Paper

Myths and facts about the alleged over-pricing of U.S. real estate. Evidence from multi-factor asset pricing models of REIT returns

Author:
Massimo Guidolin, Francesco Ravazzolo and Andrea Donato Tortora
Series:
Working Paper
Number:
19/2011

Abstract:

This paper uses a multi-factor pricing model with time-varying risk exposures and premia to examine whether the 2003-2006 period has been characterized, as often claimed by a number of commentators and policymakers, by a substantial missprcing of publicly traded real estate assets (REITs). The estimation approach relies on Bayesian methods to model the latent process followed by risk exposures and idiosynchratic volatility. Our application to monthly, 1979-2009 U.S. data for stock, bond, and REIT returns shows that both market and real consumption growth risks are priced throughout the sample by the cross-section of asset returns. There is weak evidence at best of structural misspricing of REIT valuations during the 2003-2006 sample.

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ISSN 1502-8190 (online)

Published 27 December 2011 09:50
Published 27 December 2011 09:50