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Transactions‐Driven Commercial Real Estate Returns: The Panacea to Asset Allocation Models?
Author(s) -
Webb R. Brian,
Miles Mike,
Guilkey David
Publication year - 1992
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 - 10.1111/1540-6229.00587
Subject(s) - real estate , portfolio , cost approach , variance (accounting) , economics , econometrics , capitalization rate , asset allocation , real estate investment trust , financial economics , asset (computer security) , price on application , actuarial science , business , finance , computer science , accounting , computer security
A transactions‐driven commercial real estate return series is generated in this study to determine whether the reliance on appraised values in the estimation of real estate returns is the source of the reported underpricing of real estate relative to stocks, bonds, and bills when analyzed in a traditional mean‐variance setting. The reported underpricing of commercial real estate would be rational if transactions‐driven returns exhibit more variance than appraisal‐driven returns. While we find that transactions‐driven real estate returns have greater variance than appraisal‐driven returns for individual properties, most of the individual property risk is idiosyncratic and diversified away at the portfolio level. Real estate continues to be a dominate asset class in mean‐variance allocation models even when represented with transactions‐driven indices. 1