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. 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.
SMU Cox: Real Estate (Topic)