Market efficiency and return statistics: Evidence from real estate and stock markets using a present-value approach

This paper develops a methodology to identify asset price response to news in the framework of the Campbell-Shiller log-linear present-value equation. We further show that a slow price adjustment in real estate markets not on ly induces a high serial autocorrelation in excess returns, but also dampen s the return volatility and the correlation with excess returns in other as set markets. Using Hong Kong real estate and stock market data, we find tha t the quarterly real estate price assimilates only about half the effect of market news, whereas the quarterly stock price incorporates the news fully . Our analysis identifies a cumulative price adjustment that recovers lost information in real estate returns due to market inefficiency and thereby r estores the real estate return volatility and the correlation between real estate and stock markets.