The Role of Co-Kurtosis in the Pricing of Real Estate

Abstract

Executive Summary. Most prior studies in real estate ignore the existence of systematic kurtosis risk. Using a four-moment capital asset pricing model, this paper examines the impact of co-kurtosis on real estate pricing. It shows that, in the presence of kurtosis, the expected excess rate of return is related not only to the systematic variance and systematic skewness, but also to systematic kurtosis. Investors should request more compensation in terms of expected excess rate of return because they bearing higher co-kurtosis risk. The results point out that real estate systematic kurtosis displays significant risk-return characteristic, and that systematic variance and co-kurtosis are more important than co-skewness in pricing real estate securities. The findings offer additional insights into the measurement of real estate risk. The lack of consideration of systematic kurtosis may lead to an insufficient and irrational premium for the investment risk.