An analysis of real-estate risk using the present value model

  • Crocker H. Liu
  • Jianping Mei
Article

DOI: 10.1007/BF01098913

Cite this article as:
Liu, C.H. & Mei, J. J Real Estate Finan Econ (1994) 8: 5. doi:10.1007/BF01098913

Abstract

The current study uses a present value model that allows for a time-varying expected discount rate in conjunction with a VAR process to decompose real-estate risk. The study finds that the variance ofunexpected returns accounts for most of the total risk with cash-flow risk accounting for twice as much of the unexplained real-estate risk although discount rate risk is also an important factor. This dominance of cash-flow risk is found to result in a weaker mean reversion process for real estate relative to stocks. Another finding is that real estate investors tend to become apprehensive about the future when news on future cash flow is good, and thus they demand higher expected future returns.

Key words

Real-Estate Risk VAR model Risk Decomposition REIT 

Copyright information

© Kluwer Academic Publishers 1994

Authors and Affiliations

  • Crocker H. Liu
    • 1
  • Jianping Mei
    • 2
  1. 1.Stern School of BusinessNew York UniversityNew York
  2. 2.Stern School of BusinessNew York UniversityNew York

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