The variation of economic risk premiums in real estate returns

We examine the predictable components of returns on stocks, bonds, and real estate investment trusts (REITs). We employ a multiple-beta asset pricing model and find that there are varying degrees of predictability among stock s, bonds, and REITs. Furthermore, we find that most of the predictability o f returns is associated with the economic variables employed in the asset p ricing model. The stock market risk premium is highly important in capturin g the predictable variation in stock portfolios, and the bond market risk p remiums (term and risk structure of interest rates) are important in captur ing the predictable variation in bond portfolios. For REITs, however, both the stock and bond market risk premiums capture the predictable variation i n returns. REITs have comparable return predictability to stock portfolios. We conclude that there is an important economic risk premium for REITs tha t are not captured by traditional multiple-beta asset pricing models.