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The Integration of Commercial Real Estate Markets and Stock Markets
Author(s) -
Ling David C.,
Naranjo Andy
Publication year - 1999
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 - 10.1111/1540-6229.00781
Subject(s) - real estate , capitalization rate , real estate investment trust , economics , price on application , financial economics , cost approach , capital asset pricing model , portfolio , stock (firearms) , stock exchange , monetary economics , business , finance , mechanical engineering , engineering
This paper tests whether commercial real estate markets (both exchange‐traded and non‐exchange‐traded) are integrated with stock markets using multifactor asset pricing models. The results support the hypothesis that the market for exchange‐traded real estate companies, including REITs, is integrated with the market for exchange‐traded (non‐real‐estate) stocks. Moreover, the degree of integration has significantly increased during the 1990s. However, when appraisal‐based returns (adjusted for smoothing) are used to construct real estate portfolio returns, the results fail to support the integration hypothesis, although this may reflect the inability of these estimated private market returns to accurately proxy for commercial real estate returns. Interestingly, the growth rate in real per capita consumption is consistently priced in both commercial real estate markets and stock markets, whereas previous studies have found mixed evidence on the role of consumption in explaining ex ante stock returns.