Assessing proxies for market prices of thinly traded assets with scheduled cash flows

Pseudo-market prices of infrequently traded assets with scheduled cash flows – commercial real estate appraisals and matrix prices of commercial mortgage backed securities – are compared against a VAR model to assess the extent to which these widely-used proxies are grounded in economic fundamentals...

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Bibliographic Details
Published in:Journal of empirical finance 2024-09, Vol.78, p.101499, Article 101499
Main Authors: Boudry, Walter I., Liu, Crocker H., Mühlhofer, Tobias, Torous, Walter N.
Format: Article
Language:English
Subjects:
Commercial mortgage-backed securities
Commercial real estate
Market price proxies
Pseudo prices
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Summary:Pseudo-market prices of infrequently traded assets with scheduled cash flows – commercial real estate appraisals and matrix prices of commercial mortgage backed securities – are compared against a VAR model to assess the extent to which these widely-used proxies are grounded in economic fundamentals. Property appraisals fail to fully incorporate the economic fundamentals underlying commercial real estate transactions. During the financial crisis, CMBS matrix prices captured underlying economic fundamentals and exhibited little pricing bias. However, matrix prices no longer exhibited such economic discipline after the financial crisis. Incorporating VAR forecasts considerably improves the predictive ability of appraisals and matrix prices. •We assess pseudo-market prices, appraisals and matrix prices, of illiquid assets.•We estimate prices reflecting underlying economics of assets with regular payments.•Commercial property appraisals fail to incorporate underlying economic factors.•The quality of CMBS matrix prices deteriorated after the financial crisis.
ISSN:0927-5398
DOI:10.1016/j.jempfin.2024.101499