Bank Risk and Real Estate: An Asset Pricing Perspective.

While a number of papers have investigated the time-series behavior of ex post bank stock returns and real estate returns, no study has comprehensively studied the relationship between ex ante risk premiums on both assets and the time-varying nature of such premiums in relationship to economic and real estate market conditions. In this study, we investigate how the changing nature of bank risk taking, especially in the real estate market, has affected the ex ante pricing of risk in the market for bank stocks. We find that the time variation in bank risk premiums are partly determined by interest rate and real estate market conditions. We also discover that the real estate factor has been important for banks in the 1980s. Copyright 1995 by Kluwer Academic Publishers