Please use this identifier to cite or link to this item: https://doi.org/10.1007/s11146-012-9376-x
Title: The Relationships between Real Estate Price and Expected Financial Asset Risk and Return: Theory and Empirical Evidence
Authors: Fan, G.-Z.
Huszár, Z.R. 
Zhang, W.
Keywords: Comovement
Incomplete market
Indifference pricing
Real estate
Risk and return
Issue Date: 2013
Source: Fan, G.-Z., Huszár, Z.R., Zhang, W. (2013). The Relationships between Real Estate Price and Expected Financial Asset Risk and Return: Theory and Empirical Evidence. Journal of Real Estate Finance and Economics 46 (4) : 568-595. ScholarBank@NUS Repository. https://doi.org/10.1007/s11146-012-9376-x
Abstract: In pricing real estate with indifference pricing approach, market incompleteness is shown to significantly alter the conventional pricing relationships between real estate and financial asset. Specifically, we focus on the pricing implication of market comovement because comovement tends to be stronger in financial crisis when investors are especially sensitive to price declines. We find that real estate price increases with expected financial asset return but only in weak market comovement (i. e., a normal market environment) when investors enjoy diversification benefit. When market comovement is strong, real estate price strictly declines with expected financial asset return. More importantly, contrary to the conventional positive relationship from real option studies, real estate price generally declines with expected financial asset risk. With realistic market parameters, we show that there is a nonlinear relationship between real estate price and financial risk. When the market comovement is strong, real estate price only increases with financial asset risk when the risk is low but eventually declines with the risk when it becomes high. Our cross-country empirical results also show that the relationship between financial market risk and real estate price is non-monotonic, conditional on the degree of market comovement. © 2012 Springer Science+Business Media, LLC.
Source Title: Journal of Real Estate Finance and Economics
URI: http://scholarbank.nus.edu.sg/handle/10635/44440
ISSN: 08955638
DOI: 10.1007/s11146-012-9376-x
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