Working Paper: NBER ID: w11329
Authors: Patric H. Hendershott; Robert J. Hendershott; Bryan D. MacGregor
Abstract: Periodic sharp sustained increases and then reversals in asset prices lead many to posit irrational price bubbles. The general case for irrationality is that real asset prices simply have moved too much given the future real cash flows the assets are reasonably likely to produce. A corollary for property is that observed mean reversion in real cash flows is not reflected in investor valuations, resulting in asset values being too high when real cash flows are high and vice versa. In this paper we interpret, critique and extend existing analyses of movements in real commercial property prices during the late 1980s and early 1990s.
Keywords: Commercial Property Markets; Asset Prices; Investor Behavior; Market Rationality
JEL Codes: G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sharp price reversals in commercial property values (R33) | potential irrationality (D80) |
| real office values fell significantly after substantial increases (R33) | investor valuations may not accurately reflect future cash flows (G31) |
| mean reversion in real cash flows (C22) | inflated asset values when cash flows are high (G19) |
| mean reversion in real cash flows (C22) | depressed values when cash flows are low (G33) |
| expected growth in real cash flows and changes in discount rates (D25) | fundamental values to shift abruptly (P39) |
| principal-agent problems (D82) | agents to rationally bid prices above fundamental value (D44) |
| bounded rationality (D01) | predictable deviations from rational pricing (G41) |
| cognitive biases such as overconfidence and conservatism (G41) | predictable deviations from rational pricing (G41) |
| capitalization rates (G31) | reflect mean reversion in cash flows (G19) |