Journal of Real Estate Finance and Economics, 20:2, 225±244 (2000)
# 2000 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Asymmetric Information and the Predictability of Real
Krannert School of Management, Purdue University, West Lafayette, IN 47907-1310
DAVID H. DOWNS
Terry College of Business, University of Georgia, Athens, GA 30602-6255
GARY A. PATTERSON
School of Management, State University of New York, New Paltz, NY 12561
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
information asymmetry alters the dynamic relation between returns and trading volume. We employ a ®lter-rule
methodology to determine predictability in returns and augment the return-based conditioning set with trading
volume. The additional conditioning information is necessary since the model is underspeci®ed when
predictability is based on returns alone. Our results provide new insight into the coexistence of informational and
noninformational exchange in the speculative markets for real estate assets. Speci®cally, we ®nd that the
predictability of real estate returns is generally more indicative of portfolio rebalancing effects than an adverse-
selection problem. These results are unique in addressing the time-variation in information asymmetry.
Key Words: information, predictability, real estate
The predictability of asset returns has been the focus of a large body of academic research,
with studies attributing this apparent phenomenon to informational inef®ciency, investor
irrationality, time variation in risk premia, and other market-speci®c effects. Recently, Mei
and Gao (1995) examine whether the short-term predictability of real estate assets is
exploitable in an economically meaningful sense.
They ®nd that the real estate security
market is ef®cient with respect to trading pro®ts and thus that the real estate security
markets are not accessible to competent arbitrageurs. Their study portrays a general
condition of ef®ciency in the real estate markets without considering speci®c market
conditions that may alter the behavior of asset prices. In contrast, other studies suggest that
market conditions may in¯uence informational ef®ciency and, consequently, asset prices.
Damodaran and Liu (1993) conduct a study that focuses on events producing periods of
asymmetric information that affect price movements in real estate assets. They examine a
sample of REITs that choose to reappraise themselves, an action that endows the REIT