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Time Variation of Liquidity in the Private Real Estate Market: An Empirical Investigation

  • Jim Clayton

    ()

    (University of Cincinnati Hartford, CT 06103)

  • Greg MacKinnon

    ()

    (Saint Mary’s University Halifax, Nova Scotia B3H 3C3)

  • Liang Peng

    ()

    (University of Colorado Boulder, Colorado 80309-0419)

This paper characterizes the behavior of and evaluates competing explanations for time variation in private real estate market liquidity documented in Fisher et al. (2003). In the first, sellers base their estimates of value on observations of signals from the market, but the presence of noise means a change in signal is not fully reflected in sellers?updated value estimates. The second incorporates the option value of waiting, or opportunity cost of not transacting, recently introduced by Krainer (2001) and Novy-Marx (2004), into seller’s optimal valuation strategy. In the third, we allow for the possibility of investors who are not fully rational in the sense that they trade on market sentiment and we link market-wide liquidity to investor sentiment with higher liquidity being due to the presence of irrationally over-optimistic traders. In this model measures of aggregate liquidity act as an indicator of the relative presence (or absence) of sentiment-based traders in the market place and therefore the divergence of asset price from fundamental value. Empirical findings are generally consistent with models of optimal valuation with rational updating and provide support for the opportunity cost approach.

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Article provided by American Real Estate Society in its journal journal of Real Estate Research.

Volume (Year): 30 (2008)
Issue (Month): 2 ()
Pages: 125-160

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Handle: RePEc:jre:issued:v:30:n:2:2008:p:125-160
Contact details of provider: Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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  1. Simon Gervais, 2001. "The High-Volume Return Premium," Journal of Finance, American Finance Association, vol. 56(3), pages 877-919, 06.
  2. Ortalo-Magné, François & Rady, Sven, 2005. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraint," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 50, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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  5. Ravi Dhar & William Goetzmann, 2005. "Institutional Perspectives on Real Estate Investing: The Role of Risk and Uncertainty," Yale School of Management Working Papers ysm457, Yale School of Management, revised 01 Jul 2005.
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  10. Jeffrey Fisher & Dean Gatzlaff & David Geltner & Donald Haurin, 2003. "Controlling for the Impact of Variable Liquidity in Commercial Real Estate Price Indices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(2), pages 269-303, 06.
  11. William Goetzmann & Liang Peng, 2006. "Estimating House Price Indexes in the Presence of Seller Reservation Prices," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 100-112, February.
  12. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
  13. Huberman, G. & Halka, D., 1999. "Systematic Liquidity," Papers 99-9, Columbia - Graduate School of Business.
  14. James A. Berkovec & John L. Goodman, 1996. "Turnover as a Measure of Demand for Existing Homes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(4), pages 421-440.
  15. Zhenguo Lin & Kerry D. Vandell, 2007. "Illiquidity and Pricing Biases in the Real Estate Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(3), pages 291-330, 09.
  16. James R. Follairi, 1989. "Inferring an Investment Return Series for Real Estate from Observations on Sales," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 231-234.
  17. Shaun Bond & Soosung Hwang & Zhenguo Lin & Kerry Vandell, 2007. "Marketing Period Risk in a Portfolio Context: Theory and Empirical Estimates from the UK Commercial Real Estate Market," The Journal of Real Estate Finance and Economics, Springer, vol. 34(4), pages 447-461, May.
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