TEMPORAL AND SPATIAL VARIATIONS IN MARKET LIQUIDITY, APPRAISAL SMOOTHING AND PRICE DISCOVERY IN PRIVATE AND PUBLIC REAL ESTATE MARKETS

This paper considers the processes of appraisal smoothing within the direct real estate market and of price discovery between the indirect and direct real estate markets. Appraisal smoothing involves the optimum combination of past and current information, the latter observed with an error. Price discovery between the markets requires that information is incorporated into price more quickly in one market than the other. We hypothesise that both appraisal smoothing and price discovery to vary according to market liquidity, both temporally and in cross section. A model of the combined processes is constructed and estimated separately for the U. S., U. K., Singapore and Hong Kong. A Kalman filter is used to extract and update market price and fundamental price series from the observed appraisal series. Liquidity is proxied temporally by price change.