The Spill-Over Impact of Liquidity Shocks in the Commercial Real Estate Market∗

Considerable anecdotal evidence suggests that the effects of liquidity shocks spread quickly throughout the financial sector. However, few studies have focused on the dynamics of liquidity across real-estate markets. This paper examines the liquidity spill-over impact across four markets linked by a common fundamental factor : the stock market, the derivative (Credit Default Swap (CDS)) market, the corporate-bond market, and the private real-estate (property sale–based) market. Given the fundamental link between the underlying assets of the private and public real-estate markets, liquidity shocks are especially likely to spill over across these particular markets—a point that has important implications for investment allocation and portfolio management. Employing a Vector Auto Regression (VAR) methodology, we investigate the liquidity-shock spill-over across the four markets. The VAR results show that bond-market liquidity Granger Causes CDS marketliquidity with a 2-month lag. Furthermore, stock-market liquidity Granger Causes bond-market liquidity with a 2-month lag. Variance decomposition analysis also supports that bond-market liquidity fluctuates mainly due to the liquidity shocks in the stock market. Shocks to underlying-asset liquidity also have a moderate impact on fluctuations in bond-market liquidity. Underlying asset liquidity (private-market liquidity) Granger Causes bond-market liquidity and the relation holds vice versa. However, the spill-over impact of underlying asset liquidity (private-market liquidity) on the public real-estate market varies in accordance with different measures.