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Volatility and Liquidity in the Real Estate Market

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  • Xin He
  • Zhenguo Lin
  • Yingchun Liu

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.

Suggested Citation

  • Xin He & Zhenguo Lin & Yingchun Liu, 2018. "Volatility and Liquidity in the Real Estate Market," Journal of Real Estate Research, Taylor & Francis Journals, vol. 40(4), pages 523-550, October.
    • Handle: RePEc:taf:rjerxx:v:40:y:2018:i:4:p:523-550
    DOI: 10.1080/10835547.2018.12091511
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