Risk appetite of real estate and property security markets: an empirical study of Hong Kong

Purpose - The purpose of this paper is to investigate the risk appetite in Hong Kong real estate and property security markets in the recent episode of global financial crisis. Design/methodology/approach - An advanced methodology developed from the previous risk appetite measurement and Markov Chain Monte Carlo simulation is used. Traditional research on risk appetite had never been applied to the real estate market before because no options underlying properties exist. However, this paper makes a contribution that in the absence of options, risk appetite indicators are derived for the real estate and property security markets. Findings - The empirical results show that the risk appetite for the real estate market started to fall markedly in the third quarter of 2008, matching the very period of the Sub‐prime Mortgage Crisis in the USA. By contrast, those for the property security index were stabilizing in that period. This implies that investors' risk attitude to the real estate market differs from that to the property security market. Furthermore, the correlations between the index prices and the corresponding risk appetite in each market suggest that investors are “risk neutral” in the real estate market, while they are “risk lovers” in the property security market. Originality/value - This paper, to the authors' best knowledge, is the first study to explore the risk appetite indicator in the real estate market, which could enable us to shed new light on the market price movement from the perspective of investors' market sentiment.