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Measuring and Explaining Changes in REIT Liquidity: Moving Beyond the Bid–Ask Spread
Author(s) -
Clayton Jim,
MacKin Greg
Publication year - 2000
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00794
Subject(s) - real estate investment trust , market liquidity , equity (law) , economics , monetary economics , boom , financial economics , business , real estate , finance , environmental engineering , political science , law , engineering
This paper investigates changes in REIT liquidity since the REIT boom of 1993. We use trade‐by‐trade data for REITs traded on the major U.S. exchanges to estimate and compare Kyle's (1985) measure of inverse liquidity for the 1993 and 1996 time periods. For our full sample of equity REITs, there is a significant increase in REIT liquidity in terms of the median price impact of trades. The increasing importance of the self‐advised, self‐managed organizational structure is found to be a major factor driving increased REIT liquidity. Our results imply a decline in the asymmetric information faced by market‐makers. Our investigation of the changes in the size distribution and resulting price impacts of REIT trades over the 1993–1996 period yields evidence of increased importance of informed traders to REIT price dynamics. Our findings of increased liquidity indicate that the increase in adverse‐selection costs due to the presence of more informed traders is more than offset by the increase in market thickness as a result of an increase in the number of uninformed (liquidity) traders.