| Abstract: |
This study examines the properties of wealth indices for investment in several asset classes (real estate, stocks, bonds, and
T-bills), for several types of real estate (office, retail, R&D office, and warehouse) and by region (east, mid-west, south, and
west). The series representing the value of investments in real estate and financial assets are not stationary; therefore, ordinary
statistical procedures cannot be applied. Since many of the properties that are included in the real estate series have outside
appraisals on an annual basis, especially in the fourth quarter, the real estate series may show seasonal influences. Hence, the
appropriate test for cointegration is the Johansen's test, which is formulated in such a way as to allow for deterministic
seasonality by the inclusion of seasonal dummy variables. The finding of cointegration implies that there is a long-run
relationship between the series in the cointegrated system. When the CPI (or a proxy for inflation) is included in the three
systems, the number of common factors increase to two, implying that inflation plays an important role in creating a linkage
between these time series. These findings also have implications for developing portfolios comprising financial assets and real
estate. the findings also have implications for developing a model to forecast real estate prices.
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