Stale Prices, Fragility, and Detrimental Cash: Evidence from Private Real Estate Funds

USC Lusk Center of Real Estate Working Paper Series

57 Pages Posted: 30 Aug 2019 Last revised: 24 Sep 2019

See all articles by Spencer Couts

Spencer Couts

University of Southern California - Sol Price School of Public Policy; USC Lusk Center of Real Estate

Date Written: September 23, 2019

Abstract

This paper documents a new source of financial fragility and studies its interactions with common stabilization tools. Economists believe funds report stale Net Asset Values (NAVs) when they invest in illiquid assets. This staleness creates return predictability, NAV-timing risks, and fund fragility risks for open-end funds. However, because their assets are illiquid, managers limit fund flows to deter buying assets at a premium or selling them at a discount. Limiting flows has the secondary effect of protecting against the risks stale NAVs create. Interestingly, illiquidity in the underlying assets creates the opportunity for, and the friction against, exploiting buy-and-hold investors.

Keywords: Fair Valuation, Financial Fragility, NAV-timing, Real Estate

JEL Classification: G11, G12, G13, G14, G17, G23, R33

Suggested Citation

Couts, Spencer, Stale Prices, Fragility, and Detrimental Cash: Evidence from Private Real Estate Funds (September 23, 2019). USC Lusk Center of Real Estate Working Paper Series, Available at SSRN: https://ssrn.com/abstract=3445622 or http://dx.doi.org/10.2139/ssrn.3445622

Spencer Couts (Contact Author)

University of Southern California - Sol Price School of Public Policy ( email )

Los Angeles, CA 90089-0626
United States

USC Lusk Center of Real Estate ( email )

650 Childs Way
Los Angeles, CA 90089
United States

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