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Trading Volume and Price Dispersion in Housing Markets

22 Pages Posted: 3 Sep 2008  

Chung Yim Edward Yiu

Chinese University of Hong Kong - Department of Geography and Resource Management

Siu Kei Wong

University of Hong Kong

K. F. Man

Hong Kong Polytechnic University

Date Written: September 2, 2008

Abstract

The positive volume-price (return) relationship has been intensively studied and confirmed in both financial and real estate markets, yet Stein's (1995) downpayment model and Berkovec and Goodman's (1996) search theoretic model offered no direct empirical support. This paper puts forward a liquidity premium model which explains the volume-price (return) relationship by the volume-price dispersion relationship. We posit that the extent of price dispersion depends on the level of price information available in the market (measured by the volume of past comparable transactions). The model is tested empirically using 11,267 transactions of housing units in Hong Kong from February 1992 to September 2000. The results support our theoretical prediction that the magnitude of price dispersion, as measured by the heteroskedasticity of a hedonic pricing model, is negatively and significantly related with the volume of transactions in the past 10-day and 30-day period windows. It implies that an increase in liquidity reduces pricing error risk, which in turn reduces the required risk premium in buyers' offering price, and thus a positive volume-price(return) relationship.

Keywords: Price dispersion, Trading volume, Volume-Price Relationship, Liquidity Risk

JEL Classification: G14

Suggested Citation

Yiu, Chung Yim Edward and Wong, Siu Kei and Man, K. F., Trading Volume and Price Dispersion in Housing Markets (September 2, 2008). Available at SSRN: https://ssrn.com/abstract=1262564 or http://dx.doi.org/10.2139/ssrn.1262564

Chung Yim Edward Yiu (Contact Author)

Chinese University of Hong Kong - Department of Geography and Resource Management ( email )

Shatin
the New Territories
Hong Kong
Hong Kong

HOME PAGE: http://www.grm.cuhk.edu.hk/eng/people/ppl/fac_YiuEdward.html

Siu Kei Wong

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

K. F. Man

Hong Kong Polytechnic University

Hung Hom, Kowloon
Hong Kong

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