Securitized and Direct Real Estate Factors in the Pricing of US Bank Stocks

• Author: Alain Coën,Benoît Carmichael
• DOI: http://doi.org/10.1111/irfi.12194
• Published date: 01 December 2019
• Date: 01 December 2019

Securitized and Direct Real Estate

Factors in the Pricing of US Bank

Stocks

BENOÎT CARMICHAEL

†

AND ALAIN COËN

‡

†

Département d’économique, Université Laval, Québec, Canada and

‡

Department of Finance, École des Sciences de la Gestion (ESG), Université du Québec

à Montréal (UQÀM), Montréal, Canada

ABSTRACT

This article analyzes the role of securitized and direct real estate risks in the

pricing of US bank stocks. Real estate risk measures are drawn from the

National Association of Real Estate Investment Trusts (NAREIT) and NCREIF

indexes. Beside the real estate, the other risk exposures considered are the

market, the term, and the default premiums. The period covered runs from

February 1990 to December 2015. GMM estimates of conditional multifactor

models report considerable evidence in favor of real estate risk in US bank

stocks.

JEL Codes: G12; G21; R3

Accepted: 22 March 2018

I. INTRODUCTION

The objective of this article is to study the role of real estate risk in the pricing

of US bank stocks. We proxy the real estate factor with three alternative indices

encompassing securitized (indirect) and direct real estate dimensions. Since the

financial crisis of 2007–2008 and the formulation of Basel III objectives, the

identification of the banking sector common risk factors is once again a priority

task of the literature. The Basel Committee is aiming at “raising the resilience of

the banking sector by strengthening the regulatory capital framework.”.

1

Beside the

market risk, the banking literature of Stone (1974), Lynge and Zumwalt (1980),

and Flannery and James (1984) emphasizes the interest rate exposure of banks.

So, with the notable exception of Gandhi and Lustig (2015), the literature takes

Fama and French (1992)’s perspective that firm size and book-to-market risk fac-

tors “anomalies”do not apply to financial firms because: “... the high leverage

that is normal for these firms probably does not have the same meaning as for non-

financial firms, where high leverage more likely indicates financial distress”. A con-

jecture that appears to be corroborated in Viale et al. (2009)’s empirical study.

1For more details see: https://www.bis.org/publ/bcbs189.pdf

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 19:4, 2019: pp. 893–907

DOI: 10.1111/irfi.12194