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Assessing the Real Estate Pricing Puzzle: A Diagnostic Application of the Stochastic Discounting Factor to the Distribution of REIT Returns

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  • Downs, David H

Abstract

This article applies a general asset-pricing framework and the volatility bounds methodology of Hansen and Jagannathan (1991) to REIT returns. The state of real estate asset pricing remains somewhat of a puzzle relative to the identification of state variables and the structural form of models. This article offers a framework whereby real estate asset-pricing models and data can be diagnosed to answer questions about the shortcomings. In addition, several nominated discount processes are investigated for success in pricing real estate securities. Although the nominated specifications demonstrate some success in satisfying the restrictions on the first and second moments of the real estate returns distribution, they do not successfully price the securities under a no-arbitrage condition. This result calls into question previous real estate performance studies that employ these risk-adjustment processes. Copyright 2000 by Kluwer Academic Publishers

Suggested Citation

  • Downs, David H, 2000. "Assessing the Real Estate Pricing Puzzle: A Diagnostic Application of the Stochastic Discounting Factor to the Distribution of REIT Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 20(2), pages 155-175, March.
    • Handle: RePEc:kap:jrefec:v:20:y:2000:i:2:p:155-75
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    Cited by:

    1. Colin Lizieri & Stephen Satchell & Qi Zhang, 2007. "The Underlying Return‐Generating Factors for REIT Returns: An Application of Independent Component Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(4), pages 569-598, December.
    2. J. Andrew Hansz & Wikrom Prombutr & Ying Zhang & Tingyu Zhou, 2017. "An Anatomy of the Interrelationship between Equity and Mortgage REITs," International Real Estate Review, Global Social Science Institute, vol. 20(3), pages 287-324.
    3. Kevin C.H. Chiang & Kirill Kozhevnikov & Ming-Long Lee & Craig H. Wisen, 2006. "REIT Mimicking Portfolio Analysis," International Real Estate Review, Global Social Science Institute, vol. 9(1), pages 95-111.

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