Volatility and Liquidity in the Real Estate Market

Xin He, Zhenguo Lin and Yingchun Liu

Journal of Real Estate Research, 2018, vol. 40, issue 4, 523-550

Abstract: Empirical evidence suggests that when the market becomes increasingly volatile, trading activities may be depressed or even halted. We develop a simple model to formally study the relation between market volatility and asset liquidity in the real estate market. We show that, for both cases of systemic and idiosyncratic volatility, an increase in market volatility negatively affects asset liquidity when information is asymmetric between the market participants. The results complement those of Krainer (2001) and extend those of Deng, Gabriel, Nishimura, and Zheng (2012). Indirect tests of the theory are provided by applying it to explain some empirical findings in the brokerage literature, and a strategy for directly testing the theory is outlined.

Date: 2018
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DOI: 10.1080/10835547.2018.12091511

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