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Risk aversion and urban land development options

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  • Gang‐Zhi Fan
  • Ming Pu
  • Tien Foo Sing
  • Xiaoyu Zhang

Abstract

This study empirically tests the volatility effects on land development options using the Singapore's government land sales data from 1996 to 2018. We find that development land option premiums increase by 5% on average with one standard deviation increase in conditional volatility, which is consistent with the prediction of the standard real options model. However, the high volatility effects on development options are negative in an extremely high volatility state, and risk‐averse developers exercise development options earlier than that predicted by the risk‐neutral model. The reduction in real option premium in an extremely high volatility state is not explained by market competition and risk‐mitigating mechanism. The results reveal the real estate developers’ behavior change in different states of market volatility.

Suggested Citation

  • Gang‐Zhi Fan & Ming Pu & Tien Foo Sing & Xiaoyu Zhang, 2022. "Risk aversion and urban land development options," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(3), pages 767-788, September.
    • Handle: RePEc:bla:reesec:v:50:y:2022:i:3:p:767-788
    DOI: 10.1111/1540-6229.12346
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