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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Jun 1, 2019

What’s Wrong with Pittsburgh? Delegated Investors and Liquidity Concentration


What makes an asset institutional-quality? This paper proposes that one reason is the existing concentration of delegated investors in a market through a liquidity channel. Consistent with this intuition, it documents differences in investor composition across US cities and shows that delegated investors concentrate investments in cities with higher turnover. It then calibrates a search model showing how heterogeneity in liquidity preferences makes some markets more liquid even when assets have identical cash flows. The calibration indicates that commercial real estate commands an illiquidity premium of two percentage points annually relative to a perfectly liquid asset with similar credit risk.

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