The Role of Real Estate Market on Asset Pricing Models: Empirical Evidence from Hong Kong

This paper explores the importance of real estate market for asset pricing models using Hong Kong data. The time-series regression approach is employed to examine the effect of a real estate factor on the Fama and French (1993) three factor model and on the Cahart (1997) four factor model. A residential price index and a total returns index based on average residential prices and average residential rents are used as proxies for real estate market. The empirical evidence demonstrates that significant positive real estate coefficients do exist in all pricing models under this study. In addition, the weighting scheme of portfolio construction (value-weighted portfolio vs. equally-weighted portfolio) has an impact on the regression results, in particular the real estate factor, for the monthly data as well as for the quarterly data.