The diverging role of the systematic risk factors: evidence from real estate stock markets

Abstract

Purpose – The risk-return relationship of real estate equities is of particular interest for investors, practitioners and researchers. The purpose of this paper is to examine, in an asset pricing framework, whether the systematic risk factors play a significantly different role in explaining the returns of listed real estate companies, compared to general equities. Design/methodology/approach – Running the difference test of the Fama-French three-factor and the liquidity-augmented asset pricing model, the authors analyze the effect of the systematic risk factors related to market, size, BE/ME and liquidity in a time-series setting over the period July 1992 to June 2012. By applying the propensity score matching (PSM) algorithm, the authors bypass the “curse of dimensionality” of traditional matching techniques and identify a comparable control sample of general equities, in terms of the relevant firm characteristics of size, BE/ME and liquidity. Findings – The empirical results indicate that European real estate equity returns load significantly differently on the size, value and liquidity factor, while the influence of the market factor seems to be equivalent. In addition, the authors find an economically and statistically significant underperformance of European real estate equities, after accounting for the diverging role of systematic risk factors. Running the conditional time-series regression, the authors further reveal that these findings are predominately caused by the divergent risk-return behavior of real estate equities in economic downturns. Practical implications – Due to the diverging role of the systematic risk factors in pricing real estate equities, the authors provide evidence of potential diversification benefits for investors and portfolio managers. Originality/value – This is the first real estate asset pricing study to dissect the unique risk-return relationship of real estate equities by employing propensity score matching.

The effect of risk leverage on investors’ preferences in manufacturing companies listed on the Indonesia Stock Exchange

“…Leverage is usually a description of how much money is borrowed for an investment and the company with high leverage is riskier (Stephan & Alexander, 2015). Operating leverage positively affects the market risks (Lev, 1974).…”

“…Another study also examined the role of the systematic risks in the capital market, where risks and return were the core of the research (Stephan & Alexander, 2015). The research was conducted toward risks and return in real estate in Europe.…”

“…The result shows that debt financing has a significant positive correlation to the systematic risks. Generally, risks are determined by some sources of uncertainty (Stephan & Alexander, 2015). Furthermore, some risks to the organization are determined by size, complexity of business activity, volume, etc.…”

“…Risk factors are related to market (MRP), size (SMB), and BE/ME (HML), which are derived from the general capital (Fama & French, 1993). The systematic risks generally apply in assets or liabilities (Stephan & Alexander, 2015). The systematic risk that can be measured by beta is how the company's stock is related to all securities in the capital market (Stephan & Alexander, 2015).…”

Revisiting currency swaps: hedging real estate investments in global city markets

“…However, the potentially troublesome characteristics of FDI, such as lack of local knowledge, data availability and market transparency, combined with the illiquid, immobile characteristics of heterogeneous direct property often result in challenging investment conditions. Consequently, alternative and evolving real estate investment vehicles, such as securities (Lang & Scholz, 2015;Hoesli & Reka, 2013), indices (Stevenson, 2000), REITs (Moss et al, 2015), unlisted funds (Fuerst & Matysiak, 2013) and currency swaps (Worzala et al, 1997;Ziobrowski et al, 1997), have been the subject of considerable academic discussion in relation to risk trends and return volatility, and the overarching question of how real estate could be successfully integrated into mixed-asset international portfolios.…”