Arbitrage Free Price Bounds for Property Derivatives

Syz, Juerg M.; Vanini, Paolo

doi:10.1007/s11146-009-9225-8

Cited by 10 publications

(7 citation statements)

References 22 publications

(20 reference statements)

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“…One school considers how to replicate the contingent claim of the property derivative given existing prices in the market, along with selecting a set of stochastic processes to represent dynamics of the underlying real estate index combined with risk-neutral pricing. Examples along these lines include Titman and Torous (1989), Buttimer, Kau, and Slawson (1997), Björk and Clapham (2002), Otaka and Kawaguchi (2002), Syz and Vanini (2011), and Fabozzi, Shiller, and Tunaru (2012).…”

Section: Modelling Considerationsmentioning

confidence: 99%

A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?

Fabozzi

Shiller

Tunaru

2020

Journal of Economic Perspectives

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The housing sector is the largest spot market in the world without a developed derivative contract to serve the risk management needs of market participants. This paper describes the evolution within a wider economic context of property derivatives in the United States and worldwide. We review various economic arguments presented in the literature to highlight the advantages of these financial instruments to society. The paper also provides a critical perspective on the principal obstacles hindering the development of property derivatives based on real estate prices—especially housing prices—and what can be done to overcome these difficulties. The issues discussed can serve as a guide for designing property derivatives capable of hedging real estate risk that has resurfaced time and time again in financial crises.

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Section: Modelling Considerationsmentioning

confidence: 99%

A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?

Fabozzi

Shiller

Tunaru

2020

Journal of Economic Perspectives

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“…One should then resort to methods developed for pricing in incomplete markets. A good example of this approach is given in the paper by Syz and Vanini [2011]. They studied the effect of market frictions (like transaction costs, transaction time, and short sale constraints) to explain why property returns are swapped against a rate that can deviate significantly from LIBOR.…”

Section: Swapsmentioning

confidence: 99%

Risk-Neutral Valuation of Real Estate Derivatives

Bragt

Francke

Kramer

et al. 2015

JOD

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“…Björk and Clapham (2002) developed theoretical considerations to price real estate index linked swaps. In the same vein of thought, namely, the major importance of getting pricing formula for a derivatives market to ease its development, for example, the work of Geltner and Fisher (2007) and Syz and Vanini (2011). As highlighted in a survey conducted at the MIT Centre for Real Estate in 2006, the lack of confidence in how derivatives should be priced is one of the largest barriers to their use.…”

Section: Literature Reviewmentioning

confidence: 99%

“…However, Figure 4 shows a convergence of the forward rates when maturity increases, which could be an argument in favor of the existence of arbitrage mechanisms operating on the market. Lizieri et al (2012) and Syz and Vanini (2011) argue that market frictions should result in an arbitrage-free bound price. Because most of these market frictions (transaction costs, for example) are constant and depreciable over the entire life of the contract, their impact is a negative function of time to delivery.…”

Section: Implied Forward Rates Curve: Backwardation or Contango?mentioning

confidence: 99%

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Are property derivatives a leading indicator of the real estate market?

Drouhin

Simon

2014

Journal of European Real Estate Research

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Purpose – This paper aims to analyze the statistical characteristics of changes in property forward prices. As highlighted in a survey conducted at the MIT Center for Real Estate in 2006, the relatively weak understanding in their prices is one of the most important barriers in their use. In this context, the analysis of the forward price term structure is essential. Do the short- and long-term forward prices behave similarly? Do property derivatives behave like other derivative assets or other related assets? This study also investigates the lead–lag relationship between spot and forward returns for different maturities. Design/methodology/approach – Using four years and nine months of data on the UK Investment Property Databank (IPD), all property total return swaps are examined. We strip the swaps into their forwards and study their statistical characteristics (the first four moments and their autocorrelation levels). The relationships among the forward contracts, the underlying asset (IPD index and IPD unsmoothed) and other assets (risk-free rate, listed real estate) are explored. Using the Yiu et al. (2005) methodology, the lead–lag relationship between the spot and the forwards is assessed. Findings – The index appears to be significantly less volatile and less efficient, in terms of correlation than its own derivative contracts. Moreover, changes in forward prices are leading indicators of the IPD index. Their risks tend to converge with the implied volatility of the REIT’s operating asset but without being affected by the general stock market risks. Regarding the forward price–discovery function, investors should collect information not only from the spot market but also, maybe primarily, from the derivative market. Originality/value – In this paper, we use a never-exploited database that is relative to the quotes of the UK IPD swaps. It is the first attempt to analyze the statistical characteristics of their changes. Our results show that these prices are clearly superior to the spot series, in terms of risks but without behaving affected by the tyranny of the past values. These findings may conduct to consider new methods to unsmooth current real estate indices. Characterized by a strong sensitivity to the changes in the information set, property derivative-based indicators should lead to increased efficiency in the spot market

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Arbitrage Free Price Bounds for Property Derivatives

Abstract: Property derivatives, Property spread, Arbitrage free price bounds, Market frictions, Halifax House Price Index,

Cited by 10 publications

References 22 publications

A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?

A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?

Risk-Neutral Valuation of Real Estate Derivatives

Are property derivatives a leading indicator of the real estate market?

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