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Transaction Volume and Price Dispersion in the Presale and Spot Real Estate Markets

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Abstract

Noise trading has been intensively studied in finance, but rarely in real estate. Theories of price dispersion have also been well established in retailing research, but less so in real estate. This paper is the first attempt to study the effect of noise trading on price dispersion in the real estate spot and presale (forward) markets. Quality-controlled price dispersion data series are estimated using a sample of transaction data in the housing presale and spot markets in Hong Kong. Our results show that transaction volume has a negative and significant effect on price dispersion in the spot market, but a positive and significant effect in the presale market. These support our conjecture that there are more noise traders in the presale market due to lower transaction costs. The volume effects also provide support for the use of a volume weighted least squares model when constructing a repeat sales index.

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Article Open access 05 November 2018

Clifford S. Asness, Andrea Frazzini & Lasse Heje Pedersen

Notes

  1. Shefrin and Statman (1994) suggested that noise traders increase trading volume without improving price efficiency. De Long et al. (1989, 1990, 1991), on the other hand, showed the theoretical possibility that noise traders can survive in the long-run.

  2. Volatility is also another common measure of price divergence. Yet it involves temporal dimension where other exogenous variables and dynamic characteristics have to be taken into account.

  3. Perhaps an exception is Ding (1999) who attempted to identify the determinants of bid-ask spreads in a foreign exchange futures market.

  4. See Chau et al. (2003, 2007), Wong et al. (2006, 2007), Yiu et al. (2004, 2005) for detailed descriptions of the presale system in Hong Kong.

  5. The model of Glosten and Milgrom (1985) predicts that bid-ask spread decreases over time, ceteris paribus.

  6. Another reason for adopting the repeat sales model in our empirical analysis is the relatively large volume of repeat sales in both the spot and presale markets in Hong Kong (Chau et al. 2003, 2005a, b)

  7. The University of Hong Kong Real Estate Index Series provides monthly housing price indices of Hong Kong which can be downloaded from http://hkureis.versitech.hku.hk/. The index construction method is described in Chau (2006), which can also be downloaded from the same website.

  8. Data series can be downloaded form http://www.rvd.gov.hk/en/publications/pro-review.htm

  9. Standardised No. of Transaction is defined as \(V_{\text{s}} = \frac{{V_{\text{t}} - \bar V}}{{\sigma _{V_t } }}\)

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Acknowledgements

We would like to thank our disccuant, Jim Shilling for his helpful comments. We are also grateful for comments by Tsur Somerville, S. E. Ong and other participants of the 2007 APRU Symposium on Real Estate Research. We acknowledge the financial support by a HKU CRCG grant (a/c no. 10207240) and the HKU Research Output Prize (a/c no. 10207192)

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

    C. Y. Yiu, S. K. Wong & K. W. Chau

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  1. C. Y. Yiu
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Correspondence to K. W. Chau.

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Yiu, C.Y., Wong, S.K. & Chau, K.W. Transaction Volume and Price Dispersion in the Presale and Spot Real Estate Markets. J Real Estate Finance Econ 38, 241–253 (2009). https://doi.org/10.1007/s11146-008-9161-z

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