Events and Meetings of Italian Statistical Society, Advances in Latent Variables - Methods, Models and Applications

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What Makes Residential Different from Non-Residential REITs? Evidence from Multi-Factor Asset Pricing Models
Daniele Bianchi, Massimo Guidolin, Francesco Ravazzolo

Last modified: 2013-06-14


We use Bayesian methods to estimate a multi-factor linear asset pricing model characterized by structural instability in factor loadings, idiosyncratic variances, and factor risk premia. We use such a framework to investigate the key differences in the pricing mechanism that applies to residential vs. non-residential (such as office space, industrial buildings, retail property) REITs. Under the assumption that the subprime crisis has had its epicentre in the housing/residential sector, we interpret any differential dynamics as indicative of the propagation mechanism of the crisis towards business-oriented segments of the US real estate market. We find important differences in the structure as well as the dynamic evolution of risk factor exposures across residential vs. non-residential RE-ITs. An analysis of cross-sectional mispricings reveals that only retail, residential, and mortgage-specialized REITs have been over-priced over the initial part of our sample, i.e.,1999-2006. However, the strongest mispricings occurred and may be still persisting in the office and regional mall-specialized REIT subsectors.

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