Pricing Inefficiencies in Private Real Estate Markets: Using Total Return Swaps

Lizieri, Colin, Marcato, Gianluca, Ogden, Paul and Baum, Andrew (2012) Pricing Inefficiencies in Private Real Estate Markets: Using Total Return Swaps. The Journal of Real Estate Finance and Economics, 45 (3). pp. 774-803.

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Abstract

Efficient markets should guarantee the existence of zero spreads for total return swaps. However, real estate markets have recorded values that are significantly different from zero in both directions. Possible explanations might suggest non-rational behaviour by inexperienced market players or unusual features of the underlying asset market. We find that institutional characteristics in the underlying market lead to market inefficiencies and, hence, to the creation of a rational trading window with upper and lower bounds within which transactions do not offer arbitrage opportunities. Given the existence of this rational trading window, we also argue that the observed spreads can substantially be explained by trading imbalances due to the limited liquidity of a newly formed market and/or to the effect of market sentiment, complementing explanations based on the lag between underlying market returns and index returns.

Item Type: Article
Keywords: finance
Subject(s): Finance
Date Deposited: 04 Apr 2017 13:12
Last Modified: 04 Apr 2017 13:12
Funders: not applicable
URI: http://eureka.sbs.ox.ac.uk/id/eprint/6327

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