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0.05 level
***  = significant at the 0.01 level
The F-statistics are significant on the 0.01 level for all portfolios in both periods, which
demonstrates the ability of the model to describe reality reasonably well.  Furthermore, the three-
index model proved to be superior to a a two-index-model, consisting of the same market and
interest rate factors, which was also tested: The three-index model showed higher R2
 for all
portfolios except for special banks.
Conclusions
The results of this study basically confirm our expectations and the findings of the US

studies: Bank stock returns are--at least during certain time periods--sensitive to fluctuations of thereal estate market.

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 Especially the stock returns of German mortgage banks were found to depend
upon a real estate factor.  This leads to the question whether banks have the right instruments in

place to handle real estate market risk.

3.  Managing the real estate market risk

3.1.  Status quo

According to the current literature and the author’s own empirical research the state of real

estate risk management can be characterized as follows:

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Regarding the different types of real estate-related business, a wide range of risk
management instruments is in place only in real estate lending, while direct investments are often
left out of risk management systems, and the risk attached to fee-generating real estate business is
completely ignored.
Regarding the typical elements of risk management—(1) risk identification and
measurement, (2) risk controlling and hedging—the degree of risk management also varies.  First of
all, a quantitative approach to the management of real estate risks, which is the precondition for
measuring and controlling market risk, is fairly new to most banks; sophisticated instruments,
therefore, are not readily available.  Second, as long as the risks cannot be calculated correctly, it is
natural that correct risk controlling is hindered.  Theoretically, measuring the real estate market risk
of direct investments would be relatively easy since banks could use similar instruments as for
managing the stock market risk, but in reality only few applications are known.  For real estate
loans matters are more complicated because the default risk is not normally distributed and market
prices are even harder to construct.  Therefore banks often use instruments from commercial
lending that are adapted to real estate lending, for example: analysis of financial statements, rating
or scoring instruments, sensitivity analysis, and early warning systems.  Mostly, these instruments
concentrate on the specific risks of real estate and do not measure the systematic risk.  Controlling
real estate market risk is mainly done by naive diversification within the portfolio of direct
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