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Earthquake risk embedded in property prices: Evidence from five Japanese cities

Author

Listed:
  • Masako Ikefuji

    (University of Tsukuba)

  • Roger J. A. Laeven

    (University of Amsterdam, CentER, EURANDOM)

  • Jan R. Magnus

    (Vrije Universiteit Amsterdam)

  • Yuan Yue

    (University of Amsterdam)

Abstract

We analyze the impact of short-run and long-run earthquake risk on Japanese property prices. We exploit a rich panel data set of property characteristics, ward attractiveness information, macroeconomic variables, seismic hazard data, and historical earthquake occurrences, supplemented with short-run earthquake probabilities that we generate from a seismic excitation model. We design a hedonic property price model that allows for probability weighting, employ a multivariate error components structure, and develop associated maximum likelihood estimation and variance computation procedures. We find that distorted short-run and long-run earthquake probabilities have a significantly negative impact on property prices. Our approach enables us to identify the total compensation for earthquake risk embedded in property prices and to decompose this into pieces stemming from short-run and long-run risk, and to further decompose this into objective and distorted risk components.

Suggested Citation

  • Masako Ikefuji & Roger J. A. Laeven & Jan R. Magnus & Yuan Yue, 2018. "Earthquake risk embedded in property prices: Evidence from five Japanese cities," Tinbergen Institute Discussion Papers 18-061/III, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20180061
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    2. Van Der Straten, Yasmine & Perotti, Enrico & Van Der Ploeg, Frederick, 2024. "Political Economy of Climate Change Adaptation," CEPR Discussion Papers 18959, C.E.P.R. Discussion Papers.
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    More about this item

    Keywords

    Earthquake risk; House price; Seismic excitation; Probability weighting; Hedonic pricing; Multivariate error components.;
    All these keywords.

    JEL classification:

    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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