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are the intercept and the respective sensitivities.  There are two preconditions for this
equation to hold: (1) real estate activities and interest-bearing assets and liabilities must be
sufficiently important for the banks; (2) real estate market and interest rate fluctuations must have a
significant influence on those activities.
Concerning the interest rate factor, the first precondition can be taken for granted for most
banks since interest income is their major source of revenue.  This income is subject to interest rate

changes, if the bank has a maturity-mismatch in assets and liabilities.

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 In the case of real estate, the Cole/Fenn (1994), for example, look into the relationship between commercial real estate lending and bank failure,during the US banking crisis of the late 1980s; Ghosh/Guttery/Sirmans (1994) find similar evidence for the UK.

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  An example is the empirical study of commercial mortgage defaults by Vandell (1992).

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Examples are the articles by Bae (1990) and Hies/Oertman (1995), who also give an overview of the current

literature.

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Some studies have found a declining influence of the interest rate in recent years, probably as a consequence of the broader use of hedging instruments; see--for instance--Allen/Jagtiani (1996).principle relationship is the same as for interest rates, only that all positions are "open" because tools for hedging the real estate market risk do not exist yet. Therefore one can hypothesize that the bank stock returns are positively related to the real
estate market.  "The degree to which commercial bank values are related to real estate values should
be a function of bank exposure to real estate risk, just as sensitivity to an interest-rate factor was
sometimes found to be a function of bank exposure to interest-rate risk."
2.1.  Evidence from the USA
So far, the real estate market factor has been tested by only a few researchers and mainly
for the US.  Table 1 gives a short summary of the most important American studies in chronological
order:
Table 1: Previous Studies on the Real Estate Market Risk9
Authors Data Results
Mei/
Saunders
(1991/1995)
•  indices: returns on different portfolios of 180 US-banks
(Ri), dividend yield on a market portfolio (RM), t-bill rate
(RI), ACLI cap-rate (RR), spread between AAA bonds and
t-bills (default risk factor), January variable (dummy);
•  other: return on portfolios of the stock market, government
bonds, and REITs;
•  period: 1971-1989
A premium for real estate risk is
increasingly apparent in bank stocks,
presumably reflecting these banks’
growing exposures in this area; it could
be as high as the premium for interest
rate risk.
Mei/
Lee
(1994)
•  indices: return on a stock index (Ri), dividend yield on a
market portfolio (RM), t-bill rates (RI), income yield on the
Wilshire real estate index (RR); spread between AAA
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