Using Cash Flow Dynamics to Price Thinly Traded Assets

49 Pages Posted: 27 Nov 2017 Last revised: 9 Jul 2019

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: July 5, 2019

Abstract

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

Boudry, Walter and Liu, Crocker Herbert and Muhlhofer, Tobias and Torous, Walter N., Using Cash Flow Dynamics to Price Thinly Traded Assets (July 5, 2019). Available at SSRN: https://ssrn.com/abstract=3075433 or http://dx.doi.org/10.2139/ssrn.3075433

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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