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

36 Pages Posted: 24 Jan 2008 Last revised: 30 Dec 2008

See all articles by Jim Clayton

Jim Clayton

University of Connecticut School of Business; Cornerstone Real Estate Advisers

Greg H. MacKinnon

Saint Mary's University, Canada - Department of Finance, Information Systems & Management Science

Liang Peng

Smeal College of Business, The Pennsylvania State University

Abstract

This paper characterizes the behavior of and evaluates competing explanations for time variation in private real estate market liquidity. In the first, sellers base their estimates of value on observations of signals from the market. The second incorporates the option value of waiting or the opportunity cost of not transacting 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. In this model, measures of aggregate liquidity act as an indicator of the relative presence (or absence) of sentiment-based traders in the market 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.

Keywords: time variation, market liquidity, valuation strategy, optimal valuation

Suggested Citation

Clayton, James F. and MacKinnon, Greg H. and Peng, Liang, Time Variation of Liquidity in the Private Real Estate Market: An Empirical Investigation. Journal of Real Estate Research (JRER), Vol. 30, No. 2, 2008. Available at SSRN: https://ssrn.com/abstract=1086385

James F. Clayton (Contact Author)

University of Connecticut School of Business ( email )

Storrs, CT

Cornerstone Real Estate Advisers ( email )

One Financial Plaza, Suite 1700
Hartford, CT 06103
United States

Greg H. MacKinnon

Saint Mary's University, Canada - Department of Finance, Information Systems & Management Science ( email )

Halifax, Nova Scotia B3H 3C3 B3H 3C3
Canada
902-420-5730 (Phone)
902-496-8101 (Fax)

Liang Peng

Smeal College of Business, The Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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