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Liquidity Pricing of Illiquid Assets

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  • Gianluca Marcato

Abstract

So far the main body of the asset pricing literature has computed liquidity risk premia for either markets or single assets. The vast majority of these studies have been focused on fairly liquid assets, but recently a greater attempt to price such an important component of asset pricing factors in markets with high illiquidity (especially in real estate) has also started to take place.The present paper brings these recent studies together, and estimates the liquidity premium of an illiquid asset (real estate) looking at three main aspects – time on market, liquidation bias and market liquidity – and using three main empirical models and several liquidity measures suggested in the literature. We find strong evidence of a high premium of around 3.0-3.5% that varies across sectors and periods. This estimation is robust to different measures of liquidity and model specifications.

Suggested Citation

  • Gianluca Marcato, 2018. "Liquidity Pricing of Illiquid Assets," ERES eres2018_215, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2018_215
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    More about this item

    Keywords

    Asset Pricing; Liquidity; Real Estate; Risk Premium;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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