 Illiquidity, transaction cost, and optimal holding period for real estate: Theory and applicationPing Cheng, Zhenguo Lin and Yingchun Liu Journal of Housing Economics, 2010, vol. 19, issue 2, 109-118 Abstract: Choosing the optimal holding period is an important part of real estate investment decisions, because "when to sell" affects "whether to buy". This paper presents a theoretical model for such decision making. Our model indicates that the optimal holding period is affected by both systematic and non-systematic factors--market conditions (illiquidity and transaction cost) and property performance (return and return volatility). Other things being equal, higher illiquidity and transaction costs lead to longer holding periods, while higher return volatility implies shorter holding periods. Our empirical application suggests that the optimal holding period based on our model is quite consistent with previous empirical findings. In addition, we find that when illiquidity risk is incorporated the true real estate risk is significantly higher than the conventional risk estimate. Therefore, the current practice of real estate valuation, which is naively borrowed from finance theory, substantially underestimates real estate risk. Keywords: Illiquidity; Transaction; cost; Holding; period; for; real; estate; Illiquidity; risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jhouse:v:19:y:2010:i:2:p:109-118 Access Statistics for this article Journal of Housing Economics is currently edited by H. O. Pollakowski More articles in Journal of Housing Economics from Elsevier |
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