Asymmetric information and the predictability of real estate returns

This article examines the relation between systematic price changes and the heterogeneity of investors' information sets in real estate asset markets. The empirical implications rely on a theoretical economy in which informat ion asymmetry alters the dynamic relation between returns and trading volum e. We employ a filter-rule methodology to determine predictability in retur ns and augment the return-based conditioning set with trading volume. The a dditional conditioning information is necessary since the model is underspe cified when predictability is based on returns alone. Our results provide n ew insight into the coexistence of informational and noninformational excha nge in the speculative markets for real estate assets. Specifically, we fin d that the predictability of real estate returns is generally more indicati ve of portfolio rebalancing effects than an adverse-selection problem. Thes e results are unique in addressing the time-variation in information asymme try.