Co‐skewness and Co‐kurtosis in Global Real Estate Securities

Abstract

We explore the question of whether co‐skewness and co‐kurtosis risk measures can be added to supplement to the covariance risk in pricing global real estate securities and risk premium estimation. Based on a generalized four‐moment CAPM with two alternative world market proxies, we examine Linear, Quadratic and Cubic Market Models using GMM and time‐varying Kalman‐Filter methodologies. Our results show that the second moment is important in explaining real estate securities returns. Furthermore, some real estate securities also display significant time‐varying co‐skewness and/or co‐kurtosis. Co‐kurtosis is more important than co‐skewness in pricing global real estate securities. We further find that the co‐skewness and co‐kurtosis coefficients and the resulting risk premia are sensitive to the market proxy used. The findings of this study provide additional insights into the risk‐return characteristics, pricing and portfolio design in global real estate securities.