Using Cash Flow Dynamics to Price Thinly Traded Assets: The Case of Commercial Real Estate

46 Pages Posted: 2 Nov 2014

See all articles by Walter Boudry

Walter Boudry

Cornell University

Crocker Herbert Liu

Cornell University - School of Hotel Administration

Tobias Muhlhofer

University of Miami - Department of Finance

Walter N. Torous

Massachusetts Institute of Technology

Date Written: October 28, 2014

Abstract

We propose a technique to infer cash flow yields for investment assets whose trades are infrequent, but for which cash flow data is available. We construct a Self-Propagating Rolling-Window Panel VAR framework, adapted from a Dynamic Gordon Growth Model setup. We use this framework to estimate yields and volatility in yields for untraded commercial properties as out-of-sample predictions from our VAR based on these properties’ cash flow data. We find that our predicted cash flow yields closely resemble ex-post realized transaction yields, and that these predicted yields even outperform appraisals in this respect. We find that this paradigm provides a good representation of commercial real estate yields, and propose that investors can readily apply this algorithm to infer values of untraded investment assets.

Keywords: Thinly traded assets, asset pricing, panel vector autoregression, commercial real estate

JEL Classification: G12, R33

Suggested Citation

Boudry, Walter and Liu, Crocker Herbert and Muhlhofer, Tobias and Torous, Walter N., Using Cash Flow Dynamics to Price Thinly Traded Assets: The Case of Commercial Real Estate (October 28, 2014). Available at SSRN: https://ssrn.com/abstract=2517672 or http://dx.doi.org/10.2139/ssrn.2517672

Walter Boudry

Cornell University ( email )

Ithaca, NY 14853
United States

Crocker Herbert Liu

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

Tobias Muhlhofer (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://tobias.muhlhofer.com

Walter N. Torous

Massachusetts Institute of Technology ( email )

Center for Real Estate and Sloan School
Cambridge, MA 02138
United States

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