The Journal of Real Estate Finance and Economics

, Volume 49, Issue 4, pp 477-523

First online:

Myths and Facts about the Alleged Over-Pricing of U.S. Real Estate

Evidence from Multi-Factor Asset Pricing Models of REIT Returns
  • Massimo GuidolinAffiliated withBocconi UniversityCentre for the Analysis of Investment Risk (CAIR), Manchester Business School
  • , Francesco RavazzoloAffiliated withResearch Department, Norges Bank Email author 
  • , Andrea Donato TortoraAffiliated withCassa Depositi e Prestiti S.p.A., Risk Management

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This paper uses a multi-factor pricing model with time-varying risk exposures and premia to examine whether the 2003–2006 period has been characterized, as often claimed by a number of commentators and policymakers, by a substantial mispricing of publicly traded real estate assets (REITs). The estimation approach relies on Bayesian methods to model the latent process followed by risk exposures and idiosynchratic volatility. Our application to monthly, 1979–2009 U.S. data for stock, bond, and REIT returns shows that both market and real consumption growth risks are priced throughout the sample by the cross-section of asset returns. There is weak evidence at best of structural mispricing of REIT valuations during the 2003–2006 sample.


REIT returns Bayesian estimation Structural instability Stochastic volatility Linear factor models

JEL Classifications

G11 C53