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Short Sales and Price Discovery in the Hong Kong Real Estate Market

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  • Siu Kei Wong
  • Thomas C. C. Lai
  • Kuang Kuang Deng

Abstract

Indirect real estate (IRE) returns are often shown to lead direct real estate (DRE) returns. Apart from differences in liquidity, transaction costs, and management skills, the DRE market is also less complete than the IRE market—when negative shocks arrive, one can only short IRE (e.g., real estate stocks or REITs), but not DRE. This study investigates if short sales in the IRE market convey any information to the DRE market. Based on high†frequency (weekly) property price data in Hong Kong from 2000 to 2012, we find that short sales in the IRE market led DRE returns, even after controlling for the lagged IRE returns in a VAR model. This supports an information spillover mechanism in which the DRE market learns private information that is not reflected in IRE returns. The spillover effect, however, weakened after the recent global financial crisis because the increased uncertainty over the credibility of individual firms made short sales more reflective of firm†specific information than real estate market fundamentals.

Suggested Citation

  • Siu Kei Wong & Thomas C. C. Lai & Kuang Kuang Deng, 2017. "Short Sales and Price Discovery in the Hong Kong Real Estate Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 45(1), pages 133-153, February.
    • Handle: RePEc:bla:reesec:v:45:y:2017:i:1:p:133-153
    DOI: 10.1111/1540-6229.12130
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    Cited by:

    1. George D. Cashman & David M. Harrison & Hainan Sheng, 2021. "Option Trading and REIT Returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 332-389, March.
    2. Cashman, George D. & Harrison, David M. & Sheng, Hainan, 2022. "Short sales, short risk, and return predictability in Asia-Pacific real estate markets," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    3. George D. Cashman & David M. Harrison & Hainan Sheng, 2022. "Short selling and options trading: A tale of two markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(2), pages 313-338, June.

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