The Distribution of REIT Liquidity

Abstract

In this study, we examine the distribution of market liquidity for a broad sample of real estate investment trusts (REITs). While prior research has focused on the average liquidity of REITs, we extend our analysis to include both the variability and skewness of liquidity, both of which have important implications. Excess variability in liquidity could present future uncertainty about the level of liquidity for REIT investors, which could impact returns as well as the efficacy of investment management. Increased skewness of liquidity is indicative of increased competition among market makers, which can result in better functioning financial markets. Our multivariate tests show that, consistent with the literature, average bid-ask spreads are higher for REITs than for non-REITs. We also find that the variability of bid-ask spreads is larger for REITs than for non-REITs and that the skewness of REIT bid-ask spreads has not only increased across time, but has also increased at a greater rate than the skewness of non-REIT spreads.