Fundamental value and transaction frequency: a cross sectional study in residential lots

The existence of market bubbles raises questions about economists‘ long held assumptions of rationality, costless arbitrage, and the efficient market hypothesis. I take a
theoretical approach to the debate on market efficiency by modeling a ―no-value asset,‖
which are residential vacant lots that cannot be developed. I employ a data set that
naturally controls for a number of market characteristics thought to contribute to
inefficiency. I find that no-value assets traded persistently during the market upturn, in
the early 2000s, suggesting limits to arbitrage. In the absence of inefficiency-causing
market characteristics, the behavior of agents is likely the cause. To corroborate this
claim, I create an investor confidence index using a ratio of sales to stressed sales and
find that inefficiencies were present when investor confidence was high, supporting the
idea of “irrational exuberance” on the part of traders.