Constrained Asset Prices
68 Pages Posted: 11 Nov 2016
Date Written: November 10, 2016
We develop a model of asset pricing in which buyers are either unable or unwilling to buy an asset at a price substantially above its price in recent transactions. This constraint could result from legal restrictions on appraisals, behavioral preferences, or agency problems. The model features momentum, differential pricing for identical assets, buyers' and sellers' markets, and associations between price appreciation, volume, and liquidity. We apply the model to the market for residential real estate, in which a bank's willingness to lend for a home purchase is limited by the appraisal, which is, in turn, generated by recent transaction prices of similar properties. We confirm all six predictions of the model, none of which hold in the stock market, which is not subject to this constraint.
Keywords: Momentum, Asset Pricing Anomalies, Real Estate, Appraisals
JEL Classification: G11, R30
Suggested Citation: Suggested Citation