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Real Estate and the Arbitrage Pricing Theory: Macrovariables vs. Derived Factors
Author(s) -
Chen SuJane,
Hsieh ChengHo,
Jordan Bradford D.
Publication year - 1997
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 - 10.1111/1540-6229.00725
Subject(s) - economics , arbitrage pricing theory , econometrics , real estate , arbitrage , real estate investment trust , proxy (statistics) , equity (law) , financial economics , capital asset pricing model , index arbitrage , risk arbitrage , finance , mathematics , statistics , political science , law
Two empirical models are used to implement the arbitrage pricing theory: the factor loading model (FLM) and the macrovariable model (MVM). This study compares the ability of these two models to explain real estate returns using equity REIT returns as a proxy. Two tests are performed: a comparison of crosssectional adjusted‐R2's and the Davidson and Mackinnon test. The results show that while the two models perform equally well during the period 1974–1979, the MVM outperforms the FLM over the periods 1980–1985 and 1986–1991. In addition, both models suggest superior financial performance for EREITs relative to other investments in the market during the period 1980–1985.