The diverging role of the systematic risk factors: evidence from real estate stock markets
Abstract
Purpose
The risk-return relationship of real estate equities is of particular interest for investors, practitioners and researchers. The purpose of this paper is to examine, in an asset pricing framework, whether the systematic risk factors play a significantly different role in explaining the returns of listed real estate companies, compared to general equities.
Design/methodology/approach
Running the difference test of the Fama-French three-factor and the liquidity-augmented asset pricing model, the authors analyze the effect of the systematic risk factors related to market, size, BE/ME and liquidity in a time-series setting over the period July 1992 to June 2012. By applying the propensity score matching (PSM) algorithm, the authors bypass the “curse of dimensionality” of traditional matching techniques and identify a comparable control sample of general equities, in terms of the relevant firm characteristics of size, BE/ME and liquidity.
Findings
The empirical results indicate that European real estate equity returns load significantly differently on the size, value and liquidity factor, while the influence of the market factor seems to be equivalent. In addition, the authors find an economically and statistically significant underperformance of European real estate equities, after accounting for the diverging role of systematic risk factors. Running the conditional time-series regression, the authors further reveal that these findings are predominately caused by the divergent risk-return behavior of real estate equities in economic downturns.
Practical implications
Due to the diverging role of the systematic risk factors in pricing real estate equities, the authors provide evidence of potential diversification benefits for investors and portfolio managers.
Originality/value
This is the first real estate asset pricing study to dissect the unique risk-return relationship of real estate equities by employing propensity score matching.
Keywords
Citation
Lang, S. and Scholz, A. (2015), "The diverging role of the systematic risk factors: evidence from real estate stock markets", Journal of Property Investment & Finance, Vol. 33 No. 1, pp. 81-106. https://doi.org/10.1108/JPIF-05-2014-0032
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited