Liquidity Risk of Private Assets: Evidence from Real Estate Markets

Abstract

Investment in thinly-traded private assets involves liquidity risk. Existing literature provides limited guidance as it mainly focuses on publicly-traded security assets such as stocks and bonds. This paper develops an analytical tool for quantifying liquidity risk of private assets. Using commercial real estate as a model asset and under reasonable assumptions, we find that the magnitude of liquidity risk is too large to be ignored, especially in down markets when liquidity risk is a great concern.

Keywords: Illiquidity, Liquidity risk, Thinly-traded private asset

JEL Classification: G11, G32, R3