Illiquidity and Portfolio Risk of Thinly-Traded Assets

Posted: 21 May 2019

See all articles by Ping Cheng

Ping Cheng

Florida Atlantic University - Finance

Zhenguo (Len) Lin

Florida International University (FIU) - Hollo School of Real Estate

Yingchun Liu

Dept. of Finance, Insurance, Real Estate and Law, University of North Texas

Date Written: December 1, 2008

Abstract

Thinly-traded assets exhibit illiquidity and do not fit in the efficient market paradigm. Direct application of classical finance theories to illiquid assets simply ignores the illiquidity risk of thinly-traded assets. Using commercial real estate as a testing ground, this paper develops a new, closed-form ex ante risk metric that converts illiquidity risk and integrates it with real estate price risk. Such integration provides a formal and easy-to-use analytical tool for illiquid asset pricing and enables apples-to-apples comparison between the performances of real estate and financial assets. Using real estate data, we show that the conventional risk metric significantly underestimates the true real estate risk and our finding helps to explain the apparent “risk premium puzzle” in real estate.

Suggested Citation

Cheng, Ping and Lin, Zhenguo and Liu, Yingchun, Illiquidity and Portfolio Risk of Thinly-Traded Assets (December 1, 2008). Journal of Portfolio Management, Vol. 36, 126-138, 2010, https://doi.org/10.3905/JPM.2010.36.2.126, Available at SSRN: https://ssrn.com/abstract=1491732

Ping Cheng

Florida Atlantic University - Finance ( email )

777 Glades Rd
Boca Raton, FL 33431
United States
561-297-3456 (Phone)
561-297-3686 (Fax)

Zhenguo Lin (Contact Author)

Florida International University (FIU) - Hollo School of Real Estate ( email )

Miami, FL 33199
United States
3057799248 (Phone)

Yingchun Liu

Dept. of Finance, Insurance, Real Estate and Law, University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

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