Pricing models

Pricing models try to explain how assets are priced in market equilibrium. Such models are based on theoretical reasoning and empirically observed regularities. This chapter uses a general pricing framework to motivate different pricing models that are used in practice. The presentation focusses in particular on the different variants of single- and multi-factor models. Emphasis is placed on the economic intuition of the models and their usefulness for empirical applications. With respect to applications, the chapter gives a detailed discussion of studies that have used such models to understand and compare the return rates of REITs, direct real estate, and other financial securities.