Using Cash Flow Dynamics to Price Thinly Traded Assets
49 Pages Posted: 27 Nov 2017 Last revised: 9 Jul 2019
Date Written: July 5, 2019
We investigate the importance of cash flows as opposed to discount rates to the pricing of assets that, unlike common stock, are thinly traded but have reliable cash flow information. We rely on the dynamic Gordon model, which we adapt to deal with the thin trading environment, by developing a self-propagating rolling VAR. Using data from the CMBS market, we find that cash flows are informative in valuing these thinly traded assets. Predicted yields resemble transaction yields and outperform yields based on matrix prices, especially when cash flows are more volatile, and therefore more informative.
Keywords: asset pricing, thinly traded assets, panel vector autoregression, fixed income, commercial mortgage-backed securities
JEL Classification: G12, R33
Suggested Citation: Suggested Citation