Book Assets, Real Estate, and Returns on Common Stock

Book Assets, Real Estate, and Returns on Common Stock Since real estate is common to most firms, this study examines whether there is a real estate factor in common stock returns that is not completely captured by existing asset pricing models. The three-factor model of Fama and French (1993), hereafter FF, is extended to incorporate a unique real estate factor. Using his extended-FF model, we examine the returns on 53 industry portfolios of common stocks over the 1972 through 1995 time period. The results indicate that a significant 19 percent of the industries are systematically related to the real estate factor. Most interestingly, we show that the loading of the real estate factor in common stock return is related to the loading of the book-to-market equity factor in these returns. We also construct decile portfolios of common stocks based on historical sensitivities of common stock returns to the real estate factor. The coefficients on the real estate factor vary systematically across the decile portfolios. The results of our analysis suggest that portfolio managers should manage their exposure to real estate. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Real Estate Finance and Economics Springer Journals

Book Assets, Real Estate, and Returns on Common Stock

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2000 by Kluwer Academic Publishers
Subject
Economics; Regional/Spatial Science; Financial Services
ISSN
0895-5638
eISSN
1573-045X
D.O.I.
10.1023/A:1012061418515
Publisher site
See Article on Publisher Site

Abstract

Since real estate is common to most firms, this study examines whether there is a real estate factor in common stock returns that is not completely captured by existing asset pricing models. The three-factor model of Fama and French (1993), hereafter FF, is extended to incorporate a unique real estate factor. Using his extended-FF model, we examine the returns on 53 industry portfolios of common stocks over the 1972 through 1995 time period. The results indicate that a significant 19 percent of the industries are systematically related to the real estate factor. Most interestingly, we show that the loading of the real estate factor in common stock return is related to the loading of the book-to-market equity factor in these returns. We also construct decile portfolios of common stocks based on historical sensitivities of common stock returns to the real estate factor. The coefficients on the real estate factor vary systematically across the decile portfolios. The results of our analysis suggest that portfolio managers should manage their exposure to real estate.

Journal

The Journal of Real Estate Finance and EconomicsSpringer Journals

Published: Oct 16, 2004

References

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