IDEAS home Printed from https://ideas.repec.org/a/gam/jjrfmx/v15y2022i9p390-d904642.html
   My bibliography  Save this article

An Extended Fama-French Multi-Factor Model in Direct Real Estate Investing

Author

Listed:
  • Chung-Yim Yiu

    (Department of Property, The University of Auckland Business School, Auckland 1010, New Zealand)

  • Chuyi Xiong

    (Three Gorges Finance Co., Ltd., Beijing 100197, China)

  • Ka-Shing Cheung

    (Department of Property, The University of Auckland Business School, Auckland 1010, New Zealand)

Abstract

Understanding risk-adjusted returns in real estate investment are crucial, but little is known about the risk-adjusted returns for direct real estate. This paper examines risk-adjusted total returns by developing an extended capital asset pricing model (CAPM) to investigate whether direct real estate returns compensate for their risk levels. Based on a panel dataset of the residential property transaction in 62 Territorial Authorities of New Zealand from 2002Q1 to 2018Q4, a direct real estate portfolio performance in the single-factor CAPM model is compared with the national housing markets stock markets and REITs markets in New Zealand before the pandemic. The results demonstrate that the direct real estate returns outperform the market returns with a significant positive alpha and beta smaller than one but positive. The alpha is further evaluated by the five-factor CAPM model, which includes the factors of liquidity risk, value risk, time risk, credit-rating risk, and currency risk. The assessment shows that most of the excess return (alpha) can be attributed to direct real estate market risks.

Suggested Citation

  • Chung-Yim Yiu & Chuyi Xiong & Ka-Shing Cheung, 2022. "An Extended Fama-French Multi-Factor Model in Direct Real Estate Investing," JRFM, MDPI, vol. 15(9), pages 1-14, September.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:9:p:390-:d:904642
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/1911-8074/15/9/390/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/1911-8074/15/9/390/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ka Shing Cheung & Chung Yim Yiu & Chuyi Xiong, 2021. "Housing Market in the Time of Pandemic: A Price Gradient Analysis from the COVID-19 Epicentre in China," JRFM, MDPI, vol. 14(3), pages 1-17, March.
    2. Paulo Alves, 2013. "The Fama French Model or the Capital Asset Pricing Model: International Evidence," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 7(2), pages 79-89.
    3. Dimitrios Gounopoulos & Kyriaki Kosmidou & Dimitrios Kousenidis & Victoria Patsika, 2019. "The investigation of the dynamic linkages between real estate market and stock market in Greece," The European Journal of Finance, Taylor & Francis Journals, vol. 25(7), pages 647-669, May.
    4. Mark A Chen & Qinxi Wu & Baozhong Yang, 2019. "How Valuable Is FinTech Innovation?," The Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 2062-2106.
    5. Shanthi N.S. & K. Balanaga Gurunathan, 2014. "Fama-French Three Factors Model in Indian Mutual Fund Market," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 1(1), pages 1-5.
    6. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    7. Ross, Stephen A & Zisler, Randall C, 1991. "Risk and Return in Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 175-190, June.
    8. Liang Peng, 2016. "The Risk and Return of Commercial Real Estate: A Property Level Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 44(3), pages 555-583, July.
    9. Deng, Kuang Kuang & Wong, Siu Kei & Cheung, Ka Shing & Tse, Kwok Sang, 2022. "Do real estate investors trade on momentum?," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    10. N. S. Santhi & K. Balanaga Gurunathan, 2014. "Fama-French Three Factors Model in Indian Mutual Fund Market," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 1(1), pages 1-5.
    11. Ka Shing Cheung & Siu Kei Wong, 2019. "Entry and exit affordability of shared equity homeownership: an international comparison," International Journal of Housing Markets and Analysis, Emerald Group Publishing Limited, vol. 13(5), pages 737-752, September.
    12. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    13. W. B. Brueggeman & A. H. Chen & T. G. Thibodeau, 1984. "Real Estate Investment Funds: Performance and Portfolio Considerations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 333-354, September.
    14. David C. Ling & Andy Naranjo, 1999. "The Integration of Commercial Real Estate Markets and Stock Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(3), pages 483-515, September.
    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. Chung Yim Yiu, 2023. "A Natural Quasi-Experiment of the Monetary Policy Shocks on the Housing Markets of New Zealand during COVID-19," JRFM, MDPI, vol. 16(2), pages 1-16, January.

    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. Kim Hiang Liow & Felix Schindler, 2014. "An Assessment of the Relationship between Public Real Estate and Stock Markets at the Local, Regional, and Global Levels," International Real Estate Review, Global Social Science Institute, vol. 17(2), pages 157-202.
    2. Faten Ben Bouheni & Manish Tewari, 2023. "Common risk factors and risk–return trade-off for REITs and treasuries," Journal of Asset Management, Palgrave Macmillan, vol. 24(5), pages 374-395, September.
    3. P. S. Morawakage & G. Earl & B. Liu & E. Roca & A. Omura, 2023. "Housing Risk and Returns in Submarkets with Spatial Dependence and Heterogeneity," The Journal of Real Estate Finance and Economics, Springer, vol. 67(4), pages 695-734, November.
    4. Nahzat Abbas & Jahanzeb Khan & Rabia Aziz & Zain Sumrani, 2015. "A Study to Check the Applicability of Fama and French, Three-Factor Model on KSE 100-Index from 2004-2014," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(1), pages 90-100, January.
    5. Liow, Kim Hiang & Schindler, Felix, 2011. "An assessment of the relationship between public real estate markets and stock markets at the local, regional, and global levels," ZEW Discussion Papers 11-056, ZEW - Leibniz Centre for European Economic Research.
    6. Dahlquist, Magnus & Odegaard, Bernt Arne, 2018. "A Review of Norges Bank's Active Management of the Government Pension Fund Global," UiS Working Papers in Economics and Finance 2018/1, University of Stavanger.
    7. Shi, Huai-Long & Zhou, Wei-Xing, 2022. "Factor volatility spillover and its implications on factor premia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    8. Bo-Hung Chiou & Shen-Ho Chang, 2020. "Influence of Investment Efficiency by Managers and Accounting Conservatism on Idiosyncratic Risks to Investors," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 10(1), pages 1-8.
    9. Cakici, Nusret & Zaremba, Adam, 2022. "Salience theory and the cross-section of stock returns: International and further evidence," Journal of Financial Economics, Elsevier, vol. 146(2), pages 689-725.
    10. Zhong, Angel, 2018. "Idiosyncratic volatility in the Australian equity market," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 105-125.
    11. Bradrania, Reza & Veron, Jose Francisco, 2023. "The beta anomaly in the Australian stock market and the lottery demand," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    12. Ciciretti, Rocco & Dalò, Ambrogio & Dam, Lammertjan, 2023. "The contributions of betas versus characteristics to the ESG premium," Journal of Empirical Finance, Elsevier, vol. 71(C), pages 104-124.
    13. Ladislav Kristoufek & Paulo Ferreira, 2018. "Capital asset pricing model in Portugal: Evidence from fractal regressions," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 17(3), pages 173-183, November.
    14. Martin Hoesli & Colin Lizieri & Bryan MacGregor, 2008. "The Inflation Hedging Characteristics of US and UK Investments: A Multi-Factor Error Correction Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 36(2), pages 183-206, February.
    15. Carmine De Franco & Johann Nicolle & Huyên Pham, 2019. "Dealing with Drift Uncertainty: A Bayesian Learning Approach," Risks, MDPI, vol. 7(1), pages 1-18, January.
    16. Yu Wang & Haicheng Shu, 2019. "Evaluating the Performance of Factor Pricing Models for Different Stock Market Trends: Evidence from China," Working Papers 2019-10-10, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    17. Yusuf Olatunji Oyedeko & Olusola Segun Kolawole & Isah Ibrahim & Olena Zharikova, 2023. "Risk-Return Relationship in the Nigerian Stock Market: Comparative between Fama-French Five-Factor Model and Higher Moment Fama-French Five-Factor Model," Oblik i finansi, Institute of Accounting and Finance, issue 1, pages 68-78, March.
    18. Sara Kelly Anzinger & Chinmoy Ghosh & Milena Petrova, 2017. "The Other Side of Value: The Effect of Quality on Price and Return in Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 54(3), pages 429-457, April.
    19. Shiyang Huang & Xin Liu & Dong Lou & Christopher Polk, 2024. "The Booms and Busts of Beta Arbitrage," Management Science, INFORMS, vol. 70(8), pages 5367-5385, August.
    20. Czapkiewicz, Anna & Wójtowicz, Tomasz & Zaremba, Adam, 2023. "Idiosyncratic risk and cross-section of stock returns in emerging European markets," Economic Modelling, Elsevier, vol. 124(C).

    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:gam:jjrfmx:v:15:y:2022:i:9:p:390-:d:904642. 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: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    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.