Stale Prices, Fragility, and Detrimental Cash:Evidence from Private Real Estate Funds

Submitted by lusk-admin on Wed, 10/09/2019 - 13:51
Author

Spencer J. Couts

Year Published
2019
Abstract
This paper documents a new source of financial fragility and studies its inter-actions with common stabilization tools. Economists believe funds report stale Net Asset Values (NAVs) when they invest in illiquid assets. This staleness creates return predictability, NAV-timing risks, and fund fragility risks for open-end funds. However, because their assets are illiquid, managers limit fund flows to deter buying assets at a premium or selling them at a discount. Limiting flows has the secondary effect of protecting against the risks stale NAVs create. Interestingly, illiquidity in the underlying assets creates the opportunity for, and the friction against, exploiting buy-and-hold investors.
Research Category