2016-02: Examining US REITs Pricing Bubbles: An Application of the CCAPM with Stochastic Taxation and Money Supply

This paper examines three issues relating to US REITs pricing. First, using a modified Consumption Capital Asset Pricing Model (CCAPM) with stochastic taxation and money supply, we compute the fundamental values for United States Real Estate Investment Trusts (REITs) for our data sample, 1972-2013. Our empirical analysis for US REIT pricing is statistically consistent with the CCAPM with stochastic taxation and monetary policy. Second, for our purposes, for publicly traded equity REITs, we define a bubble at a point in time to be the difference between the actual stock market price and the fundamental value derived from our theoretical model. United States REITs have, among other corporate structural features, special rules governing dividend distributions and corporate taxation treatment that make them an especially attractive and preferred vehicle for testing for the presence of pricing bubbles. Our study suggests that during the sample time horizon, United States REITs experienced many price bubbles, some of which were quite large. Third, our empirical results imply that monetary policy, in the short run, plays a role in the formation of these pricing bubbles.