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Market-Based Solutions to Vital Economic Issues
Research
Mar 16, 2017

Asset-Level Risk And Return In Real Estate Investments

Abstract

In stark contrast with liquid asset returns, commercial real estate idiosyncratic return means and variances do not scale with the holding period. This puzzling phenomenon survives a variety of controls for vintage effects, systematic risk heterogeneity, and sample selection biases. To explain these findings, I derive an equilibrium search-based illiquid asset-pricing model which, when calibrated, provides an excellent fit to the data. Thus a structural model of transaction risk seems crucial to understanding real estate investment returns. Recent empirical literature suggests that these insights can be extended to other illiquid asset classes such as private equity and residential real estate.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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