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Trading Volume and Price Dispersion in Housing Markets

Author

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  • C. Y. Yiu
  • K. F. Man
  • S. K. Wong

Abstract

The positive volume‐price (return) relationship has been intensively studied and confirmed in both financial and real estate markets, yet their theoretic models offered few direct empirical support. This paper puts forward a liquidity premium model which explains the volume‐price (return) relationship by the volume‐price dispersion relationship. We posit that the extent of price dispersion depends on the level of price information available in the market (measured by the volume of past comparable transactions). The model is tested empirically in two sample periods on the transactions of housing units of an estate in Hong Kong from February 1992 to September 2000 (11,267 transactions), and from May 1991 to May 2008 (18,368 transactions), respectively. The results support our theoretical prediction that the magnitude of price dispersion, as measured by the residuals of a hedonic pricing model, is negatively and significantly related with the volume of transactions in the past 10‐day and 30‐day period windows. It implies that an increase in liquidity reduces pricing error risk, which in turn reduces the required risk premium in buyers' offering price, and thus a positive volume‐price (return) relationship.

Suggested Citation

  • C. Y. Yiu & K. F. Man & S. K. Wong, 2008. "Trading Volume and Price Dispersion in Housing Markets," Journal of Property Research, Taylor & Francis Journals, vol. 25(3), pages 203-219, December.
    • Handle: RePEc:taf:jpropr:v:25:y:2008:i:3:p:203-219
    DOI: 10.1080/09599910802696615
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    Cited by:

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    2. Sutirtha Bagchi, 2018. "A Tale of Two Cities: An Examination of Medallion Prices in New York and Chicago," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 53(2), pages 295-319, September.
    3. Gaetano Lisi, 2011. "Price Dispersion in the Housing Market: The Role of Bargaining and Search Costs," Working Papers hal-00628323, HAL.
    4. Tsai, I-Chun & Peng, Chien-Wen, 2016. "Linear and nonlinear dynamic relationships between housing prices and trading volumes," The North American Journal of Economics and Finance, Elsevier, vol. 38(C), pages 172-184.
    5. Xian Zheng, 2015. "Expectation, volatility and liquidity in the housing market," Applied Economics, Taylor & Francis Journals, vol. 47(37), pages 4020-4035, August.
    6. Chien-Chiang Lee & Chin-Yu Wang & Jhih-Hong Zeng, 2017. "Housing price–volume correlations and boom–bust cycles," Empirical Economics, Springer, vol. 52(4), pages 1423-1450, June.
    7. Lisi, Gaetano, 2011. "Price dispersion in the housing market: the role of bargaining and search costs," MPRA Paper 33863, University Library of Munich, Germany.
    8. Tsai, I-Chun, 2019. "Dynamic price–volume causality in the American housing market: A signal of market conditions," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 385-400.
    9. Antonia Díaz & Belén Jerez & Juan Pablo Rincón-Zapatero, 2024. "Housing Prices and Credit Constraints in Competitive Search," The Economic Journal, Royal Economic Society, vol. 134(657), pages 220-270.
    10. Deng, Kuang Kuang & Wong, Siu Kei & Cheung, Ka Shing & Tse, Kwok Sang, 2022. "Do real estate investors trade on momentum?," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).

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