Working Paper: NBER ID: w25966
Authors: Andra C. Ghent
Abstract: What makes an asset institutional-quality? This paper proposes that one reason is the existing concentration of delegated investors in a market through a liquidity channel. Consistent with this intuition, it documents differences in investor composition across US cities and shows that delegated investors concentrate investments in cities with higher turnover. It then calibrates a search model showing how heterogeneity in liquidity preferences makes some markets more liquid even when assets have identical cash flows. The calibration indicates that commercial real estate commands an illiquidity premium of two percentage points annually relative to a perfectly liquid asset with similar credit risk.
Keywords: delegated investors; liquidity; commercial real estate; market dynamics
JEL Codes: G11; G12; G23; R33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market segmentation by liquidity preference (G11) | differences in liquidity across markets (G19) |
| differences in liquidity across markets (G19) | illiquidity premium for commercial real estate investments (R33) |
| trade frequency in a metropolitan statistical area (MSA) (R12) | likelihood that a purchaser is a delegated investor (G24) |
| investor type (delegated investors) (G23) | holding periods (C41) |