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Dynamic correlation: A tool hedging house-price risk?

Author

Listed:
  • Berg, Nathan
  • Gu, Anthony Y.
  • Lien, Donald

Abstract

Dynamic correlation models demonstrate that the relationship between interest rates and housing prices is non-constant. Estimates reveal statistically significant time fluctuations in correlations between housing price indexes and Treasury bonds, the S&P 500 Index, and stock prices of mortgage-related companies. In some cases, hedging effectiveness can be improved by moving from constant to dynamic hedge ratios. Empirics reported here point to the possibility that incorrect assumptions of constant correlation could lead to mis-pricing in the mortgage industry and beyond.

Suggested Citation

  • Berg, Nathan & Gu, Anthony Y. & Lien, Donald, 2007. "Dynamic correlation: A tool hedging house-price risk?," MPRA Paper 26368, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:26368
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    File URL: https://mpra.ub.uni-muenchen.de/26368/1/MPRA_paper_26368.pdf
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    References listed on IDEAS

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    3. Anton Bekkerman, 2011. "Time‐varying hedge ratios in linked agricultural markets," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 71(2), pages 179-200, August.

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    More about this item

    Keywords

    Real Estate; Time-Varying Risk; Time-Dependent Variance; Risk Premium; Risk Aversion; Housing Risk; Portfolio Choice; Ecological Rationality; Behavioral Economics; Bounded Rationality;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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