Intrinsic Value, Transaction Price Movement, and Cointegration

William G. Hardin, Xiaoquan Jiang, Zhongua Wu and Qianying Zhang

Financial Management, 2025, vol. 54, issue 4, 741-760

Abstract: The commercial real estate market provides a unique environment to evaluate the movement of transaction price to intrinsic value. Given the latent nature of intrinsic value, empirical assessment has been difficult. Long‐term use of both judgment (appraisal)‐ and transaction‐based values in real estate to provide tradable price and return benchmark allows testing of the intrinsic value to price relation. Based on NCREIF property return data from 1984 to 2019, we show that the transaction‐based index (TBI) and the appraisal‐based index (NPI) are cointegrated, and the error correction term forecasts TBI returns but not NPI returns. These results indicate that when short‐run deviation occurs, it is the TBI not the NPI that eventually converges back to the equilibrium state of the TBI–NPI system. Further tests reveal that the common trend of the TBI–NPI cointegrated system is associated with the income stream from commercial properties (a fundamental variable).

Date: 2025
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