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Beyond Index-Based Hedging: Can Real Estate Trigger a New Breed of Derivatives Market?

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  • Patrick Lecomte

Abstract

Executive Summary. As index-based real estate deriv-atives are being introduced in the United States, this pa-per questions the validity of these instruments for hedging risks involved in commercial real estate markets. It first shows that the concept of index-based derivatives may not be appropriate for intrinsically heterogeneous assets such as real estate. Based on an innovative frame-work drawn from the field of biomedical sciences, it then proposes the establishment of a radically new breed of derivatives market that would enable effective hedging of commercial real estate assets. It concludes by outlining a framework for modeling real estate risk based on ge-netics that could be used with the proposed derivatives market.This paper is the winner of the best paper on Innovative Thinking “Thinking Out of the Box” (sponsored by the Homer Hoyt Advanced Studies Institute) award pre-sented at the 2007 American Real Estate Society Annual Meeting in San Francisco, California.

Suggested Citation

  • Patrick Lecomte, 2007. "Beyond Index-Based Hedging: Can Real Estate Trigger a New Breed of Derivatives Market?," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 13(4), pages 345-378, January.
    • Handle: RePEc:taf:repmxx:v:13:y:2007:i:4:p:345-378
    DOI: 10.1080/10835547.2007.12089791
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