by Daniele Bianchi, Massimo Guidolin, Francesco Ravazzolo
We propose a flexible Bayesian model averaging method to estimate a factor pricing model characterized by structural uncertainty and instability in factor loadings and idiosyncratic risks. We use such a framework to investigate key differences in the pricing mechanism that applies to residential vs. non-residential real estate investment trusts (REITs). An analysis of cross-sectional mispricings reveals no evidence of a pure hous- ing/residential real estate bubble inflating between 1999 and 2007, to subsequently burst. In fact, all REITs sectors record increasing alphas during this period, and show important differences in the dynamic evolution of risk factor exposures.
Keywords: I-CAPM, Mispricing, REIT, Model Uncertainty, Stochastic Breaks, Bayesian Econometrics
JEL codes: G12, E44, C11, C58
IGIER - Università Bocconi