The variation of economic risk premiums in real estate returns

GA Karolyi, AB Sanders - The Journal of Real Estate Finance and …, 1998 - Springer
The Journal of Real Estate Finance and Economics, 1998Springer
We examine the predictable components of returns on stocks, bonds, and real estate
investment trusts (REITs). We employ a multiple-beta asset pricing model and find that there
are varying degrees of predictability among stocks, bonds, and REITs. Furthermore, we find
that most of the predictability of returns is associated with the economic variables employed
in the asset pricing model. The stock market risk premium is highly important in capturing the
predictable variation in stock portfolios, and the bond market risk premiums (term and risk …
Abstract
We examine the predictable components of returns on stocks, bonds, and real estate investment trusts (REITs). We employ a multiple-beta asset pricing model and find that there are varying degrees of predictability among stocks, bonds, and REITs. Furthermore, we find that most of the predictability of returns is associated with the economic variables employed in the asset pricing model. The stock market risk premium is highly important in capturing the predictable variation in stock portfolios, and the bond market risk premiums (term and risk structure of interest rates) are important in capturing the predictable variation in bond portfolios. For REITs, however, both the stock and bond market risk premiums capture the predictable variation in returns. REITs have comparable return predictability to stock portfolios. We conclude that there is an important economic risk premium for REITs that are not captured by traditional multiple-beta asset pricing models.
Springer
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