Interest rate sensitivity and risk premium of property stocks

Abstract

This study examines the relationship between interest rate risk and returns of traded property stocks from an asset pricing perspective. Three exogenous factors are included in the APT model, in particular unexpected long-term interest rate fluctuation, unexpected market returns and unexpected industry returns. Using the weekly returns of 18 property stocks listed in Singapore between 1992 and 2001, an Iterated Non-linear Seeming Unrelated Regression (ITNLSUR) technique was employed to simultaneously estimate the sensitivities of these factors and how they are priced. Consistent with existing empirical evidence, the regression results show that the interest rate risk of property stocks is systematic and is priced in the APT framework. The study also reveals that the pricing of the interest rate risk is sensitive to the prevailing market conditions.