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Index-Based Futures and Options Markets in Real Estate

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Abstract

Most institutional and individual portfolios are very undiversified in real estate: many hold no real estate at all, many have holdings highly concentrated in certain regions or types of real estate. The risk of these concentrated holdings is not hedged. We propose here that cash-settled futures and options markets be opened on real estate to better allow diversification and hedging, and show that these markets solve problems that have hampered other real estate hedging media in the past. Related institutions, such as home equity insurance, might develop around the futures and options markets. The establishment of these markets is likely to increase the quantity of reproducible real estate, and lower rents on real estate. It may also reduce the amplitude of speculative real estate price movements and dampen the business cycle.

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  • Karl E. Case & Robert J. Shiller & Allan N. Weiss, 1991. "Index-Based Futures and Options Markets in Real Estate," Cowles Foundation Discussion Papers 1006, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1006
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    Cited by:

    1. Iacoviello, Matteo & Ortalo-Magne, Francois, 2003. "Hedging Housing Risk in London," The Journal of Real Estate Finance and Economics, Springer, vol. 27(2), pages 191-209, September.
    2. Luttmer, Erzo F. P. & Zeckhauser, Richard & Kousky, Carolyn, 2006. "Permits to Elicit Information," Working Paper Series rwp06-049, Harvard University, John F. Kennedy School of Government.
    3. M.I. Dröes & H Garretsen & W.J.J. Manshanden, 2012. "The Diversification Benefits of Free Trade in House Value," Working Papers 12-03, Utrecht School of Economics.
    4. Shiller, Robert J & Weiss, Allan N, 1999. "Home Equity Insurance," The Journal of Real Estate Finance and Economics, Springer, vol. 19(1), pages 21-47, July.
    5. Rady, Sven & Ortalo-Magné, François, 2002. "Homeownership," Discussion Papers in Economics 28, University of Munich, Department of Economics.
    6. Dröes, Martijn I. & Hassink, Wolter H.J., 2013. "House price risk and the hedging benefits of home ownership," Journal of Housing Economics, Elsevier, vol. 22(2), pages 92-99.
    7. Robert J. Shiller & Karl E. Case & Allan N. Weiss, 1995. "Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate," Cowles Foundation Discussion Papers 1098, Cowles Foundation for Research in Economics, Yale University.
    8. Shiller, Robert J, 1993. "Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures," Journal of Finance, American Finance Association, vol. 48(3), pages 911-931, July.
    9. Joshua Aizenman & Brian Pinto, 2004. "Managing Volatility and Crises: A Practitioner's Guide Overview," NBER Working Papers 10602, National Bureau of Economic Research, Inc.
    10. Shiller, Robert J., 1995. "Aggregate income risks and hedging mechanisms," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 119-152.
    11. Steven Sheffrin & Tracy Turner, 2001. "Taxation and House-Price Uncertainty: Some Empirical Estimates," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 621-636, August.
    12. Englund, Peter & Hwang, Min & Quigley, John M, 2002. "Hedging Housing Risk," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 167-200, Jan.-Marc.
    13. Robert Buckley & Gulmira Karaguishiyeva & Robert Order & Laura Vecvagare, 2006. "Mortgage credit risk in EU countries: Constraints on exploiting the single currency market," European Journal of Law and Economics, Springer, vol. 21(1), pages 13-27, January.
    14. Mr. Nicolas R Blancher & François Haas & Mr. John Kiff & Ms. Oksana Khadarina & Mr. Paul S. Mills & Parmeshwar Ramlogan & Mr. William Lee & Ms. Yoon Sook Kim & Todd Groome & Mr. Shinobu Nakagawa, 2006. "The Limits of Market-Based Risk Transfer and Implications for Managing Systemic Risks," IMF Working Papers 2006/217, International Monetary Fund.
    15. Felix Schindler, 2013. "Predictability and Persistence of the Price Movements of the S&P/Case-Shiller House Price Indices," The Journal of Real Estate Finance and Economics, Springer, vol. 46(1), pages 44-90, January.
    16. Buckley, Robert & Karaguishiyeva, Gulmira & Van Order, Robert & Vecvagare, Laura, 2003. "Comparing mortgage credit risk policies : an options-based approach," Policy Research Working Paper Series 3047, The World Bank.
    17. Robert J. Shiller & Allan N. Weiss, 1998. "Moral Hazard in Home Equity Conversion," Cowles Foundation Discussion Papers 1177, Cowles Foundation for Research in Economics, Yale University.
    18. Kyungwon Kim & Jae Wook Song, 2018. "Managing Bubbles in the Korean Real Estate Market: A Real Options Framework," Sustainability, MDPI, vol. 10(8), pages 1-25, August.
    19. Felix Schindler, 2014. "Persistence and Predictability in UK House Price Movements," The Journal of Real Estate Finance and Economics, Springer, vol. 48(1), pages 132-163, January.
    20. Abel Cadenillas & Robert Elliott & Hong Miao & Zhenyu Wu, 2009. "Risk-Hedging in Real Estate Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 16(4), pages 265-285, December.
    21. J Coakley, 1994. "The Integration of Property and Financial Markets," Environment and Planning A, , vol. 26(5), pages 697-713, May.
    22. Christoph Hinkelmann & Steve Swidler, 2008. "Trading House Price Risk with Existing Futures Contracts," The Journal of Real Estate Finance and Economics, Springer, vol. 36(1), pages 37-52, January.
    23. Kyungwon Kim & Jae Wook Song, 2020. "Detecting Possible Reduction of the Housing Bubble in Korea for Different Residential Types and Regions," Sustainability, MDPI, vol. 12(3), pages 1-31, February.

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    More about this item

    Keywords

    Real estate; prices; portfolio choice;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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