Essays on capital markets and real estate finance

This dissertation examines the relation between the performance of residential real estate and traditional capital markets in the United States. For example, we focus on the performance of housing markets and returns on stocks of companies headquartered in those areas. The dissertation includes three parts. Each part is an individual essay.Part 1 investigates the robustness of the price comovement among stocks of firms headquartered in the same city, a finding of Pirinsky and Wang (2006). We test for such local return comovement with multiple pricing factors and relying on test methods based on resampling techniques. Extending empirical models of stock returns to include pricing factors reduces the magnitude of local return comovement, and robustness tests reveal that an implicit null hypothesis of zero local comovement is inappropriate as there is positive return comovement with other city portfolios, on average. Nevertheless, results benchmarked against estimates based on resampling methods indicate a significant and robust headquarters-city effect in stock returns.Part 2 explores how conditions in residential real-estate markets affect the pricing of local stocks. We find that stocks of companies headquartered in 'hot' residential real-estate markets experience higher risk adjusted returns and stronger return comovement relative to stocks from 'cold' markets. These conditional patterns in local stock prices are especially prevalent during the 1999 to 2004 period that coincides with the so-called 'housing bubble'. These findings suggest that changes in investors' real-estate wealth affect trading activity and pricing of local stocks.Part 3 examines the extent to which capital market pricing factors affect changes in the value of residential real estate at the neighborhood level across the U.S. Specifically, we explore changes in median sales prices for homes across more than 3000 U.S. zip codes in order to see whether changes in home prices are sensitive to returns on U.S. stocks and bonds. In estimations that address autocorrelation in real-estate price changes and non-synchronicity in the pricing of homes versus stocks and bonds, we find that, on average, home-price changes are positively exposed to returns on stocks and bonds. Moreover, we show a price-level effect in that home prices in higher priced zip codes have greater exposure to capital market risk factors. This finding is consistent with higher levels of capital market participation and wealth among owners of higher priced homes.