The role of co-skewness in the pricing of real estate

Abstract

The current study investigates whether systematic skewness offers an alternative perspective as to why the riskadjusted returns on real estate should be similar to that for stocks. This is not a trivial issue since an affirmative finding implies that we might be incorrectly measuring real estate risk from both a pricing and a portfolio allocation perspective. A multivariate test of the Kraus-Litzenberger model is used to investigate this skewness proposition with the K-L CAPM tested against several alternative versions of the CAPM. The study finds that the KrausLitzenberger model offers additional insights into the measurement of real estate risk. Evidence is also found that both the zero beta and the consumption-oriented CAPM hold, which is consistent with the recent literature in real estate.

Asymmetric Risk Measures and Real Estate Returns

“…Vines et al (1994) investigated the role of co-skewness in the pricing of equity REITs. Contrary to Liu et al (1992), their study found no evidence that co-skewness is a determinant of REIT returns.…”

“…Liu et al (1992) use CREF data to examine the impact of co-skewness on real estate returns and found evidence that co-skewness does provide some explanatory power to real estate returns. Vines et al (1994) investigated the role of co-skewness in the pricing of equity REITs.…”

Tail Parameters of Stable Distributions Using One Million Observations of Real Estate Returns from Five Continents

“…This renders application of theories like the mean-variance portfolio optimization to real world data problematic and further fuels the concerns discussed above. Among others, Liu et al (1992) and Myer and Webb (1993) first provided evidence for this. Using non-normality in their MPT application, Byrne and Lee (1997) show that the National Council of Real Estate Fiduciaries (NCREIF) data is non-normal.…”

Coskewness in European real estate equity returns

“…Liu, Hartzell and Grissom (1992) are the first to test whether systematic skewness is priced in real estate returns. They employ quarterly appraisal-based data on five commingled real estate funds (CREFs) from 1979 to 1989 for a multivariate test of the Kraus-Litzenberger model.…”