Verification for Liquidity of Real Estate Assets via Artificial Market Approach

Abstract

Asset Management Industry may experience a drastic change. The added value of the industry might be lower due to the improvement of technology (Fintech), Fiduciary duty and passive trend. Under such situation, the differentiation of traditional investment will be more and more difficult, and investor will favor alternative products. However, Asset Management companies face the big hurdle in providing alternative products to individual investors due to the Liquidity. Japan regulator tend to restrict the illiquidity assets from the perspective of investor protection. This study will focus on the Real Estate, one of the major alternative products. Real Estate itself is illiquidity asset, while equity Real Estate Investment Trusts (REIT), one of the Real Estate investment products, is liquidity asset and every investor can trade it every day, every time as equity. And regulator tend to restrict other less liquidity Real Estate investment products from the perspective of investor protection as many investors had painful experience in 90s. There were many empirical researches for the liquidity issue of equity REIT. However, all there are using the historical data, and it is difficult the analysis without the market environmental change. This study uses a financial market simulation (artificial market) constructed virtually on computer to assess the relationship between liquidity and market price. Artificial market method has been using for short selling rule and other regulation rule in Japan, but no trade frequency simulation has been conducted before. Analysis results showed that 1. High liquidity might heighten the volatility of the marketable securities. And it will case the price divergence between market price and original value. 2. Fundamental investors and Technical investors should have the same trade frequency. 3. For real estate assets, due to the information disclosure frequency, the trade frequency which can make market efficiency might be once per monthly.