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Geographically Overlapping Real Estate Assets, Liquidity Spillovers, and Liquidity Multiplier Effects

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Abstract

When liquidity providers for one asset obtain information from other asset prices, this may magnify the (upward or downward) comovement of asset liquidity. It also may yield an illiquidity multiplier (Cespa and Foucault, Review of Financial Studies, 27(6), 1615–1660, 2014). We empirically test the magnitude of this illiquidity multiplier for a sample of U.S. equity real estate investment trusts (REITs) using spatial autoregressive models (Zhu and Milcheva, Journal of Real Estate Finance and Economics, 61(3), 443–475, 2018). We find significant liquidity spillovers among REITs with geographically overlapping real estate holdings. Our findings suggest that the multiplier effect impacts neighboring REITs through cross-asset learning about firm fundamentals. This effect is stronger during market turmoil, after the Decimalization (a source of exogenous variation), and for REITs headquartered in MSAs with less information asymmetry.

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Fig. 1

Source: S&P Global Market Intelligence

Fig. 2

Source: authors’ calculations

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Notes

  1. The underlying assets of REITs are predominantly commercial real estate. For instance, according to NAREIT, “at least 75 percent of a REIT's assets must consist of real estate assets such as real property or loans secured by real property”.

  2. Seeking Alpha website wrote in June 7th, 2016: “… over the last year Essex Property Trust (ESS) has adopted a strategy similar to Equity Residential (EQR), moving its portfolio closer to tenant desired features like Whole Foods Market”. Also, in this article “… we see value in comparing EQR to Essex Property Trust (NYSE: ESS) due to an increasing geographic overlap between the two REIT portfolios”.

  3. Karolyi, Lee, and Van Dijk (2012) provide an excellent survey of existing explanations for liquidity commonality and empirically test them using international data.

  4. Cespa and Foucault (2014): “it would be interesting to measure empirically the strength of liquidity spillovers across asset classes… Another interesting issue is how the number of assets affects the amplification mechanism described in our paper and whether some assets are more pivotal for liquidity spillovers, because their prices are followed by more dealers or because their payoff structure makes them informative about a large number of assets”.

  5. (Cohen, 2010).

  6. Based on Gershgorin’s Theorem (Cohen, 2002), spatial lags of dependent variables are valid instruments for spatial lags of independent variable.

  7. SUTVA requires that “the (potential outcome) observation on one unit should be unaffected by the particular assignment of treatments to the other units” (Cox, 1958). One of the assumptions of SUTVA is that spillovers, or indirect effects, across units do not exist (Wang, Cohen, and Glascock, 2019).

  8. Based on 2010 Census, the United States has 929 CBSAs, including 380 metropolitan statistical areas (MSAs) and 541 micropolitan statistical areas (μSAs).

  9. In an unreported analysis, we also constructed spatial weights matrices using 10, 50, 75, and 100 km as alternative benchmarks. The results are similar and are not sensitive to how we define the benchmark.

  10. The mean (standard deviation) of market capitalization is 2,089 (3,691). Since both Amihud illiquidity and market capitalization are log transformed, one standard deviation increase in the market capitalization would lead to \(1-{(1+\frac{\mathrm{3,691}}{\mathrm{2,089}})}^{\beta }\) change in Amihud illiquidity.

  11. Investopedia wrote: “The U.S. Securities and Exchange Commission (SEC) ordered all stock markets within the U.S. to convert to decimalization by April 9, 2001, and all price quotes since appear in the decimal trading format… The switch was made to decimalization to conform to standard international practices and to make it easier for investors to interpret and react to changing price quotes”.

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Acknowledgements

We acknowledge helpful comments from Wayne R. Archer, John Clapp, Xiaoying Deng, Zifeng Feng, David Harrison, Shantaram Hegde, Mariya Letdin, Tobias Mühlhofer, Geoffrey Turnbull, and seminar participants at the 2018 FSU-UF-UCF Critical Issues in Real Estate Symposium, the American Real Estate Society (ARES), the Global Chinese Real Estate Congress (GCREC), and the American Real Estate and Urban Economics Association (AREUEA-ASSA) Conference. All errors remain our own. Address correspondence to Chongyu Wang, Department of Real Estate and Construction, The University of Hong Kong, Pok Fu Lam, Hong Kong.

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  1. Department of Real Estate and Construction, The University of Hong Kong, Hong Kong, Hong Kong

    Chongyu Wang

  2. Department of Finance, University of Connecticut, Mansfield, CT, USA

    Jeffrey P. Cohen & John L. Glascock

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  1. Chongyu Wang
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  2. Jeffrey P. Cohen
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Correspondence to Chongyu Wang.

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Wang, C., Cohen, J.P. & Glascock, J.L. Geographically Overlapping Real Estate Assets, Liquidity Spillovers, and Liquidity Multiplier Effects. J Real Estate Finan Econ (2022). https://doi.org/10.1007/s11146-022-09905-0

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