Performance of Thinly Traded Assets: A Case in Real Estate

26 Pages Posted: 6 Jul 2013

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

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Date Written: August 2013

Abstract

Thinly traded private assets do not fit into the traditional finance paradigm of a liquid and well‐functioning market where trading is continuous and instantaneous. Since private assets cannot be bought and sold easily, they bear liquidity risk. Classical finance theories cannot properly gauge the performance of illiquid private assets because they implicitly assume such illiquidity is trivial. This paper proposes an alternative performance metric for the illiquid private asset, which explicitly captures liquidity risk in a formal analysis. Applying the new performance metric, we are able to explain the decades‐old “real estate risk premium puzzle.”

Keywords: liquidity risk, private assets, investment performance

JEL Classification: G11, G12

Suggested Citation

Cheng, Ping and Lin, Zhenguo and Liu, Yingchun, Performance of Thinly Traded Assets: A Case in Real Estate (August 2013). Financial Review, Vol. 48, Issue 3, pp. 511-536, 2013, Available at SSRN: https://ssrn.com/abstract=2290450 or http://dx.doi.org/10.1111/fire.12013

Ping Cheng (Contact Author)

Florida Atlantic University - Finance ( email )

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

Zhenguo Lin

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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