Empirical Analysis of the Illiquidity Premia of German Real Estate Securities

Thomas Paul; Thomas Walther; André Küster-Simic

doi:10.1007/s11408-021-00398-0

Empirical Analysis of the Illiquidity Premia of German Real Estate Securities

Thomas Paul, Thomas Walther, André Küster-Simic

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

In this study, we analyze illiquidity premia and their effect on the expected returns of German real estate securities. To this end, we use a unique data set that includes real estate stocks, real estate investment trusts (REITs), and open- and closed-end real estate funds for 2003–2017. We follow Amihud’s (JFM 5:31–56, 2002) structural approach; specifically, we estimate Amihud’s illiquidity factors, investigate the relationships between expected returns and illiquidity, and analyze the effects of expected and unexpected market illiquidity on future returns. We show that illiquidity plays an important role in expected returns for real estate stocks and investment trusts (REITs); however, it has less clear effects on open- and closed-end funds. We find that the adjusted ILLIQ includes appropriate correction factors for securities with low trading activity and is a useful improvement. We also find evidence of structural breaks in the relationship between returns and illiquidity.

Original language	English
Pages (from-to)	203–260
Number of pages	58
Journal	Financial Markets and Portfolio Management
Volume	36
Issue number	2
DOIs	https://doi.org/10.1007/s11408-021-00398-0
Publication status	Published - Jun 2022

Bibliographical note

Funding Information:
We are thankful to Markus Schmid (the editor), Yakov Amihud, Markus Rudolf, Catharina Claußen, and seminar participants at the IPAG Paris Financial Management Conference 2018, Paris, WHU Vallendar, and Hamburgisches Weltwirtschaftsinstitut for helpful comments and suggestions. Furthermore, we would like to sincerely thank the two anonymous reviewers whose constructive feedback have significantly improved the quality of the paper. We also thank the Karlsruhe Institute of Technology, Fondsbörse Deutschland AG and Deutsche Zweitmarkt AG for making the stock and fund trading information available. Part of the work has been conducted during Thomas Walther’s research time as Assistant Professor at the University of St. Gallen, Institute for Operations Research and Computational Finance. We are solely responsible for any errors.

Publisher Copyright:
© 2021, The Author(s).

Keywords

Asset Pricing
Real Estate
REITs
Risk Factors
Illiquidity

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Cite this

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title = "Empirical Analysis of the Illiquidity Premia of German Real Estate Securities",

abstract = "In this study, we analyze illiquidity premia and their effect on the expected returns of German real estate securities. To this end, we use a unique data set that includes real estate stocks, real estate investment trusts (REITs), and open- and closed-end real estate funds for 2003–2017. We follow Amihud{\textquoteright}s (JFM 5:31–56, 2002) structural approach; specifically, we estimate Amihud{\textquoteright}s illiquidity factors, investigate the relationships between expected returns and illiquidity, and analyze the effects of expected and unexpected market illiquidity on future returns. We show that illiquidity plays an important role in expected returns for real estate stocks and investment trusts (REITs); however, it has less clear effects on open- and closed-end funds. We find that the adjusted ILLIQ includes appropriate correction factors for securities with low trading activity and is a useful improvement. We also find evidence of structural breaks in the relationship between returns and illiquidity.",

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author = "Thomas Paul and Thomas Walther and Andr{\'e} K{\"u}ster-Simic",

note = "Funding Information: We are thankful to Markus Schmid (the editor), Yakov Amihud, Markus Rudolf, Catharina Clau{\ss}en, and seminar participants at the IPAG Paris Financial Management Conference 2018, Paris, WHU Vallendar, and Hamburgisches Weltwirtschaftsinstitut for helpful comments and suggestions. Furthermore, we would like to sincerely thank the two anonymous reviewers whose constructive feedback have significantly improved the quality of the paper. We also thank the Karlsruhe Institute of Technology, Fondsb{\"o}rse Deutschland AG and Deutsche Zweitmarkt AG for making the stock and fund trading information available. Part of the work has been conducted during Thomas Walther{\textquoteright}s research time as Assistant Professor at the University of St. Gallen, Institute for Operations Research and Computational Finance. We are solely responsible for any errors. Publisher Copyright: {\textcopyright} 2021, The Author(s).",

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N2 - In this study, we analyze illiquidity premia and their effect on the expected returns of German real estate securities. To this end, we use a unique data set that includes real estate stocks, real estate investment trusts (REITs), and open- and closed-end real estate funds for 2003–2017. We follow Amihud’s (JFM 5:31–56, 2002) structural approach; specifically, we estimate Amihud’s illiquidity factors, investigate the relationships between expected returns and illiquidity, and analyze the effects of expected and unexpected market illiquidity on future returns. We show that illiquidity plays an important role in expected returns for real estate stocks and investment trusts (REITs); however, it has less clear effects on open- and closed-end funds. We find that the adjusted ILLIQ includes appropriate correction factors for securities with low trading activity and is a useful improvement. We also find evidence of structural breaks in the relationship between returns and illiquidity.

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Empirical Analysis of the Illiquidity Premia of German Real Estate Securities

Abstract

Bibliographical note

Keywords

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