Pricing Inefficiencies in Private Real Estate Markets Using Total Return Swaps

Posted: 28 Nov 2012

See all articles by Colin Lizieri

Colin Lizieri

University of Cambridge - Department of Land Economy

Gianluca Marcato

Henley Business School - University of Reading

Paul Ogden

inProp Capital LLP

Andrew Baum

University of Oxford, Said Business School

Date Written: 2012

Abstract

Efficient markets should guarantee the existence of zero spreads for total return swaps. However, real estate markets have recorded values that are significantly different from zero in both directions. Possible explanations might suggest non-rational behaviour by inexperienced market players or on unusual features of the underlying asset market. We find that institutional characteristics in the underlying market lead to market inefficiencies and, hence, to the creation of a rational trading window with upper and lower bounds within which transactions do not offer arbitrage opportunities. Given the existence of this rational trading window, we also argue that the observed spreads can substantially be explained by trading imbalances due to the limited liquidity of a newly formed market and/or to the effect of market sentiment, complementing explanations based on the lag between underlying market returns and index returns.

Keywords: total return swaps, asset pricing, real estate market inefficiencies

Suggested Citation

Lizieri, Colin M. and Marcato, Gianluca and Ogden, Paul and Baum, Andrew, Pricing Inefficiencies in Private Real Estate Markets Using Total Return Swaps (2012). Journal of Real Estate Finance and Economics, Vol. 45, No. 3, 2012, Available at SSRN: https://ssrn.com/abstract=2178138

Colin M. Lizieri

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk/staff/profiles/clizieri.htm

Gianluca Marcato (Contact Author)

Henley Business School - University of Reading ( email )

Department of Real Estate & Planning
Reading, RG6 6UD
United Kingdom
+44 (0)118 3788178 (Phone)
+44 (0)118 3788172 (Fax)

Paul Ogden

inProp Capital LLP

1 Sun Street
London, EC2A 2EP
United Kingdom

Andrew Baum

University of Oxford, Said Business School ( email )

Park End Street
Oxford, OX1 1HP
United Kingdom

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