IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v94y2018icp118-130.html
   My bibliography  Save this article

Real estate as a common risk factor in bank stock returns

Author

Listed:
  • Carmichael, Benoît
  • Coën, Alain

Abstract

This article investigates the potential role of real estate risk in the pricing of US bank stocks from February 1990 to December 2015. Generalized method of moments estimates of conditional multifactor models are provided. The real estate risk is proxied by the return of an investment strategy that is short on low-leverage real estate investment trust (REIT) assets and long on high-leverage REIT assets. We group banks into portfolios based on their market capitalization, real estate loans as a proportion of total assets, and book-to-market ratios. The results suggest that the real estate premium is a relevant risk factor in bank stocks returns. For instance, we find that a 100-basis-point increase to the real estate premium increases returns by 15.8 to 20.1 basis points for portfolios grouped by market capitalization. This conclusion remains when other oft-cited bank risk factors are considered, including small-minus-big, high-minus-low and the return on equity of the financial sector.

Suggested Citation

  • Carmichael, Benoît & Coën, Alain, 2018. "Real estate as a common risk factor in bank stock returns," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 118-130.
    • Handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:118-130
    DOI: 10.1016/j.jbankfin.2018.07.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426618301547
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2018.07.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hoesli, Martin & Oikarinen, Elias, 2012. "Are REITs real estate? Evidence from international sector level data," Journal of International Money and Finance, Elsevier, vol. 31(7), pages 1823-1850.
    2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    3. John V. Duca & Patric H. Hendershott & David C. Ling, 2017. "How Taxes and Required Returns Drove Commercial Real Estate Valuations over the Past Four Decades," National Tax Journal, National Tax Association;National Tax Journal, vol. 70(3), pages 549-584, September.
    4. Lynge, Morgan J. & Zumwalt, J. Kenton, 1980. "An Empirical Study of the Interest Rate Sensitivity of Commercial Bank Returns: A Multi-Index Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(3), pages 731-742, September.
    5. Sadka, Ronnie, 2010. "Liquidity risk and the cross-section of hedge-fund returns," Journal of Financial Economics, Elsevier, vol. 98(1), pages 54-71, October.
    6. Flannery, Mark J & James, Christopher M, 1984. "The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-1153, September.
    7. John Y. Campbell & Robert J. Shiller, 1988. "Stock Prices, Earnings and Expected Dividends," Cowles Foundation Discussion Papers 858, Cowles Foundation for Research in Economics, Yale University.
    8. Matteo Iacoviello, 2015. "Financial Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 140-164, January.
    9. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2011. "Common Risk Factors in Currency Markets," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3731-3777.
    10. Joseph L. Pagliari & Kevin A. Scherer & Richard T. Monopoli, 2005. "Public Versus Private Real Estate Equities: A More Refined, Long-Term Comparison," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(1), pages 147-187, March.
    11. Donald W. K. Andrews, 1999. "Consistent Moment Selection Procedures for Generalized Method of Moments Estimation," Econometrica, Econometric Society, vol. 67(3), pages 543-564, May.
    12. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
    13. Barber, Brad M & Lyon, John D, 1997. "Firm Size, Book-to-Market Ratio, and Security Returns: A Holdout Sample of Financial Firms," Journal of Finance, American Finance Association, vol. 52(2), pages 875-883, June.
    14. repec:bla:jfinan:v:43:y:1988:i:3:p:661-76 is not listed on IDEAS
    15. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    16. Richard K. Green, 1997. "Follow the Leader: How Changes in Residential and Non‐residential Investment Predict Changes in GDP," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(2), pages 253-270, June.
    17. Adrian, Tobias & Muir, Tyler, 2015. "The Cost of Capital of the Financial Sector," CEPR Discussion Papers 11031, C.E.P.R. Discussion Papers.
    18. Priyank Gandhi & Hanno Lustig, 2015. "Size Anomalies in U.S. Bank Stock Returns," Journal of Finance, American Finance Association, vol. 70(2), pages 733-768, April.
    19. Viale, Ariel M. & Kolari, James W. & Fraser, Donald R., 2009. "Common risk factors in bank stocks," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 464-472, March.
    20. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    21. Stone, Bernell K., 1974. "Systematic Interest-Rate Risk in a Two-Index Model of Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(5), pages 709-721, November.
    22. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
    23. Ferson, Wayne E, 1990. "Are the Latent Variables in Time-Varying Expected Returns Compensation for Consumption Risk?," Journal of Finance, American Finance Association, vol. 45(2), pages 397-429, June.
    24. Fung, William & Hsieh, David A, 2001. "The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers," The Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 313-341.
    25. Elias Oikarinen & Martin Hoesli & Camilo Serrano, 2011. "The Long-Run Dynamics between Direct and Securitized Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 33(1), pages 73-104.
    26. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    27. repec:arz:wpaper:eres2012-232 is not listed on IDEAS
    28. Brent W. Ambrose & Dong Wook Lee & Joe Peek, 2007. "Comovement After Joining an Index: Spillovers of Nonfundamental Effects," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(1), pages 57-90, March.
    29. Don M. Chance & William R. Lane, 1980. "A Re-Examination Of Interest Rate Sensitivity In The Common Stocks Of Financial Institutions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 3(1), pages 49-55, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sing, Tien Foo & Wang, Long, 2021. "Spillovers of Non-Fundamental Risks: The Tale of Two Securitized Real Estate Markets," International Real Estate Review, Global Social Science Institute, vol. 24(2), pages 185-220.
    2. Venmans, Frank, 2021. "The leverage anomaly in U.S. bank stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    3. Carmichael, Benoît & Coën, Alain, 2020. "Real estate as a common risk factor in the financial sector: International evidence," Finance Research Letters, Elsevier, vol. 32(C).
    4. Akhtaruzzaman, Md & Chiah, Mardy & Docherty, Paul & Zhong, Angel, 2021. "Betting against bank profitability," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 304-323.
    5. Lian, Ziying & Cai, Jun & Webb, Robert I., 2020. "Oil stocks, risk factors, and tail behavior," Energy Economics, Elsevier, vol. 91(C).
    6. Martin Hauptfleisch, 2019. "Financial Decision-Making Using Data," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 6-2019, January-A.
    7. Saad Alsunbul & Basim Alzugaiby & Sajid Chaudhry & Rhada Boujlil, 2024. "The fatter the tail, the shorter the sail," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 331-380, March.
    8. Coën, Alain & Desfleurs, Aurélie, 2024. "Geopolitical risk and the dynamics of REITs returns," Finance Research Letters, Elsevier, vol. 64(C).
    9. Yang, Huan & Cai, Jun & Huang, Lin & Marcus, Alan J., 2021. "Bank stocks, risk factors, and tail behavior," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 203-229.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Coën, Alain & Desfleurs, Aurélie, 2024. "Geopolitical risk and the dynamics of REITs returns," Finance Research Letters, Elsevier, vol. 64(C).
    2. Carmichael, Benoît & Coën, Alain, 2020. "Real estate as a common risk factor in the financial sector: International evidence," Finance Research Letters, Elsevier, vol. 32(C).
    3. Ben Ammar, Semir & Eling, Martin & Milidonis, Andreas, 2018. "The cross-section of expected stock returns in the property/liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 292-321.
    4. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    5. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    6. Akhtaruzzaman, Md & Chiah, Mardy & Docherty, Paul & Zhong, Angel, 2021. "Betting against bank profitability," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 304-323.
    7. Baek, Seungho & Bilson, John F.O., 2015. "Size and value risk in financial firms," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 295-326.
    8. Bessler, Wolfgang & Kurmann, Philipp, 2014. "Bank risk factors and changing risk exposures: Capital market evidence before and during the financial crisis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 151-166.
    9. Weis Christian & René-Ojas Woltering & Steffen Sebastian, 2017. "The Interest Rate Sensitivity of Value and Growth Stocks - Evidence from Listed Real Estate," ERES eres2017_325, European Real Estate Society (ERES).
    10. Huang, Qiubin & de Haan, Jakob & Scholtens, Bert, 2020. "Does bank capitalization matter for bank stock returns?," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    11. Carmich[ae]l, Benoit & Samson, Lucie, 2005. "Consumption growth as a risk factor? Evidence from Canadian financial markets," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 83-101, February.
    12. Xiangnan Meng & Xin Deng, 2013. "Interest Rate and Foreign Exchange Sensitivity of Bank Stock Returns: Evidence from China," Multinational Finance Journal, Multinational Finance Journal, vol. 17(1-2), pages 77-106, March - J.
    13. Andrey Pavlov & Eva Steiner & Susan Wachter, 2018. "The Consequences of REIT Index Membership for Return Patterns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 46(1), pages 210-250, March.
    14. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    15. Murtazashvili, Irina & Vozlyublennaia, Nadia, 2012. "The role of data limitations, seasonality and frequency in asset pricing models," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 555-574.
    16. repec:wyi:journl:002108 is not listed on IDEAS
    17. Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, vol. 106(3), pages 586-613.
    18. David C. Ling & Andy Naranjo, 2015. "Returns and Information Transmission Dynamics in Public and Private Real Estate Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(1), pages 163-208, March.
    19. Vendrame, Vasco & Guermat, Cherif & Tucker, Jon, 2018. "A conditional regime switching CAPM," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 1-11.
    20. Dou, Winston Wei & Ji, Yan & Wu, Wei, 2021. "Competition, profitability, and discount rates," Journal of Financial Economics, Elsevier, vol. 140(2), pages 582-620.
    21. Ferson, Wayne E. & Harvey, Campbell R., 1997. "Fundamental determinants of national equity market returns: A perspective on conditional asset pricing," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1625-1665, December.

    More about this item

    Keywords

    Asset pricing; Real estate risk; Bank stocks; Multifactor models; GMM;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:118-130. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.