REAL-ESTATE AND THE ARBITRAGE PRICING THEORY - MACROVARIABLES VS DERIVED FACTORS

Two empirical models are used to implement the arbitrage pricing theor y: the factor loading model (FLM) and the macrovariable model (MVM). T his study compares the ability of these two models to explain real est ate returns using equity REIT returns as a proxy. Two tests are perfor med: a comparison of cross-sectional adjusted-R2's and the Davidson an d Mackinnon test. The results show that while the two models perform e qually well during the period 1974-1979, the MVM outperforms the FLM o ver the periods 1980-1985 and 1986-1991. In addition, both models sugg est superior financial performance for EREITs relative to other invest ments in the market during the period 1980-1985.