Conclusion

The empirical asset pricing literature has discovered many patterns in the cross section of equity returns that the CAPM fails to explain. Fama and French (1992, 1993, 1995, 1996) illustrate that much of the cross-sectional variation in average returns can be explained by the size and book-to-market effects and propose an alternative model which includes, in addition to the market factor, a factor related to size (SMB) and a factor related to book-to-market (HML). Fama and French demonstrate that their model is highly successful in explaining average returns. Still, there is a good deal of controversy in the literature about the true nature of the Fama-French factors, since the factors do not reflect explicit, known sources of risk. Thus, the investigation of economic link to the Fama-French factors is essential to supporting a rational-pricing story. Recent studies address this concern and find that news about future GDP growth, aggregate distress risk, default spread surprise factor, and term spread surprise factor capture important pricing implications contained in the Fama-French factors. My work adds to this line of research. Especially, the objective of this dissertation is to investigate empirically that such a coherent link exists with regard to real estate risk.