Premium
Is There a Risk Premium Puzzle in Real Estate?
Author(s) -
Shilling James D.
Publication year - 2003
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1046/j.1080-8620.2003.00075.x
Subject(s) - real estate , economics , risk premium , ex ante , financial economics , real estate investment trust , equity (law) , capitalization rate , equity premium puzzle , econometrics , finance , macroeconomics , political science , law
This paper is based on my Presidential Address to the American Real Estate and Urban Economics Association delivered at Washington, D.C., in January 2003. The paper asks whether there is a risk premium puzzle in real estate. I examine this question by reporting on an empirical investigation of real estate investors' expectations over the last 15 years. The results suggest that ex ante expected risk premiums on real estate are quite large for their risk, too large to be explained by standard economic models. Further, the results suggest that ex ante expected returns are higher than average realized equity returns over the past 15 years because realized returns have included large unexpected capital losses. The latter conclusion suggests that using historical averages to estimate the risk premium on real estate is misleading.