Abstract
This paper employs four established market microstructure measures on information-based trade in financial markets. A set of German mid and small caps is used to analyze potential differential information content in real estate stocks compared to other asset classes. After linking substantially lower amounts of information-based trade in real estate stocks to higher liquidity premia, it is found that the evolution of the information content in real estate and other assets follows similar trends. Consequently, interdependence is tested for rolling time windows, revealing strong informational links between real estate and other assets. Particularly, small caps, financials, as well as companies offering consumer goods and services show a close relationship to real estate. Depending on the choice of the measure of information-based trade, up to 75% of the variation in the information content in real estate shares is related to other asset classes, pointing to the notion of high dependence.
Highlights
IntroductionThe literature on the market microstructure discusses extensively the role of information in (financial) markets
The literature on the market microstructure discusses extensively the role of information in markets
Aiming at the discovery of informational links in the evolution of real estate and other assets in financial markets, four established, market microstructure measures on information-based trade and illiquidity are applied to a set of real estate, mid and small caps in German exchanges
Summary
The literature on the market microstructure discusses extensively the role of information in (financial) markets. Beyond seminal contributions by [1] and [2] extending classical market theory to asymmetric information, a number of empirical measures on information-based trade were developed and applied to financial market data. While one strand of the literature relates these measures to corporate behavior, such as investment activity or CEO turnover, the contribution of this article is to stress the empirical observation that information-based trade relates to the market segment. [3] finds substantial differences in the information content for financials compared to other asset classes. Asset turnover and index affiliation reveal significant differentials, as well. Given that industry indices in financial markets often combine real estate with other financial data, this article relates prior findings to the real estate segment of the German market
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