Trading Volume and Price Dispersion in Housing Markets
22 Pages Posted: 3 Sep 2008
Date Written: September 2, 2008
Abstract
The positive volume-price (return) relationship has been intensively studied and confirmed in both financial and real estate markets, yet Stein's (1995) downpayment model and Berkovec and Goodman's (1996) search theoretic model offered no 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 using 11,267 transactions of housing units in Hong Kong from February 1992 to September 2000. The results support our theoretical prediction that the magnitude of price dispersion, as measured by the heteroskedasticity 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.
Keywords: Price dispersion, Trading volume, Volume-Price Relationship, Liquidity Risk
JEL Classification: G14
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Price Discovery Function of Forward Contracts in the Real Estate Market: An Empirical Test
By K.w. Chau, Siu Kei Wong, ...
-
Do the Forward Sales of Real Estate Stabilize Spot Prices?
By Siu Kei Wong, Edward Chung Yim Yiu, ...
-
Do the Forward Sales of Real Estate Stabilize Spot Prices?
By Siu Kei Wong, Edward Chung Yim Yiu, ...
-
Housing Quality in the Forward Contracts Market
By K.w. Chau, Siu Kei Wong, ...
-
Presales, Financing Constraints, and Developers' Production Decisions
By Su Han Chan, Fang Fang, ...
-
Volatility Transmission in the Real Estate Spot and Forward Markets
By Siu Kei Wong, K.w. Chau, ...
-
Determinants of Returns and Volatility of Chinese Adrs at NYSE
By Ali M. Kutan and Haigang Zhou
-
By Yongheng Deng and Peng Liu
-
By Edward Chung Yim Yiu, K.w. Chau, ...