Trading and Volatility in Dual Market: Theory and Evidence from Real Estate

Lingxiao Li, Bing Zhu

Research output: Contribution to journalArticlepeer-review

2 Scopus citations


This article investigates the informational role of trading volume and the impact of transaction costs on trading volume and the return dynamics in public and private markets, using real estate as an application. The model extends Kyle (1985) in a framework with two markets associated with asymmetric transaction costs across markets and over time. It derives equilibrium and predicts that at the market downtime, investors’ incentive to trade in the public market increases while that in the private market declines based on a return-cost trade-off, which is when transaction cost in the private market accelerates. Trading volume induces return volatility. The marginal effect of trading volume on price increases monotonically with uncertainty in asset values and transaction costs. An assessment using a simulation method and data on public and private real estate markets in the United States from 1996 to 2014 validates the model’s propositions. We offer two explanations for the increased real estate investment trust (REIT) return volatility during the financial crisis: increased trading volume in the REIT market and a larger marginal impact of volume on price during market downtime.

Original languageEnglish
Pages (from-to)151-183
Number of pages33
JournalJournal of Real Estate Research
Issue number2
StatePublished - 2022


  • REITs
  • Transaction cost
  • return volatility
  • trading volume


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