Excess Returns of Industrial Stocks and the Real Estate Factor

In order to identify the major risk factors in pricing industrial stocks, this study estimates different models based on six explanatory factors: the overall stock market, size, book-to-market equity ratio, the term structure, default risk, and the unsecuritized real estate market. The results of this study indicate that the real estate factor plays an important role in explaining excess returns on industrial stocks, along with other risk factors. The coefficient of the stock market factor declines when the real estate market factor is included in the model. Therefore, the large coefficient in the single-factor (stock market) model probably results from covariation between the overall stock market factor and the real estate factor. Results for subperiods indicate that the effects of the real estate factor are quite stable and second only to the overall stock market factor.