The Impact of Market Imperfections on Real Estate Returns and Optimal Investor Portfolios

Crocker H. Liu, Terry V. Grissom and David J. Hartzell

Real Estate Economics, 1990, vol. 18, issue 4, 453-478

Abstract: This study investigates the consequences of several imperfections associated with real estate markets on pricing and optimal investor portfolios from a CAPM context. CAPM assumptions are relaxed to recognize illiquidity, the consumption and investment attributes of owner‐occupied housing, and a mildly segmented market structure. The study finds that relaxing the CAPM assumptions lead to a separate pricing paradigm for financial assets, income‐producing real estate and owner‐occupied housing respectively, that a “dividend effect” arises for real estate as the result of illiquidity, and that illiquidity reduces the extent to which investors hold real estate in their portfolios.

Date: 1990
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Real Estate Economics is currently edited by Crocker Liu, N. Edward Coulson and Walter Torous

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