Investor Sentiment, Limits to Arbitrage, and Private Market Returns

Real Estate Economics, Forthcoming

Posted: 4 Jan 2013

See all articles by David C. Ling

David C. Ling

University of Florida - Hough Graduate School of Business Administration

Andy Naranjo

University of Florida - Warrington College of Business Administration

Benjamin Scheick

Villanova University - Department of Finance

Date Written: January 3, 2013

Abstract

This paper examines the relation between investor sentiment and returns in private markets. Relative to more liquid public markets, private investment markets exhibit significant limits to arbitrage that restrict an investor’s ability to counteract mispricing. We utilize private commercial real estate as the testing ground for our analysis due to the significant limits to arbitrage that characterize this market. Using vector autoregressive models, we find a positive and economically significant relation between investor sentiment and subsequent private market returns. A one standard deviation shock in sentiment results in a 3.0% increase in returns over the subsequent three quarters. We provide further long-horizon regression evidence suggesting that private real estate markets are susceptible to prolonged periods of sentiment-induced mispricing as the inability to short-sell in periods of overvaluation and restricted access to credit in periods of undervaluation prevents arbitrageurs from entering the market.

Keywords: investor sentiment, arbitrage, private markets

Suggested Citation

Ling, David C. and Naranjo, Andy and Scheick, Benjamin, Investor Sentiment, Limits to Arbitrage, and Private Market Returns (January 3, 2013). Real Estate Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2196081

David C. Ling (Contact Author)

University of Florida - Hough Graduate School of Business Administration ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States
(352) 392-0153 (Phone)
(352) 392-0301 (Fax)

Andy Naranjo

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3781 (Phone)

Benjamin Scheick

Villanova University - Department of Finance ( email )

United States

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