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- Title
Risk-Neutral Valuation of Real Estate Derivatives.
- Authors
VAN BRAGT, DAVID; FRANCKE, MARC K.; SINGOR, STEFAN N.; PELSSER, ANTOON
- Abstract
This article proposes a novel and intuitive risk-neutral valuation model for real estate derivatives. The authors first model the underlying efficient market price of real estate and then construct the observed index value with an adaptation of the price update rule by Blundell and Ward [1987]. The resulting index behavior can easily be analyzed and closed-form pricing solutions are derived for forwards, swaps, and European put and call options. They demonstrate the application of the model by valuing a put option on a house price index. Autocorrelation in the index returns appears to have a large impact on the option value. They also study the effect of an over- or undervalued real estate market. The observed effects are significant and as expected.
- Subjects
MONEY market; PRICES of securities; EFFICIENT market theory; MARKET pricing; REVENUE management
- Publication
Journal of Derivatives, 2015, Vol 23, Issue 1, p89
- ISSN
1074-1240
- Publication type
Article
- DOI
10.3905/jod.2015.23.1.089