Tuesday, June 16, 2009

SSRN-Hedging Real-Estate Risk by Frank Fabozzi, Robert Shiller, Radu Tunaru

SSRN-Hedging Real-Estate Risk by Frank Fabozzi, Robert Shiller, Radu Tunaru:
"Real-estate assets represent more than one-third of the value of all the underlying physical capital in the United States and the world. The relationship between the level of interest rates and housing prices does not always follow one direction and a shock event in one market may trigger deep repercussions in the other. With the spread of the securitization process, the risks rooted in these two fundamental markets can have far reaching outcomes."

A fairly long "Look-in" that captures the basic idea:

"The introduction of derivatives in the real-estate market is not easy because liquidity is difficult to establish when returns are predictable. An extensive discussion highlighting the important psychological barriers that need to be passed for the establishment of real-estate derivatives is provided in Shiller [2008]. ...The major obstacle for the introduction of real-estate derivatives was that when returns follow trends at certain points in time, then market sentiment is in only one direction and it is difficult to find counterparties trading against the trend. Nevertheless, if a futures contract is already trading for a series of future maturities, then the shape of the forward curve on real-estate index becomes important. Trades may be executed on the curve, say short a futures with a long maturity and long a futures with shorter maturity, which would be impossible to execute otherwise. With futures and options on futures, an entire spectrum of trading strategies becomes available and market participants such as hedge funds, investment houses, and private equity funds may provide much needed liquidity.2"

1 comment:

Condos in Toronto said...

Very nice paper, interesting reading. Thank you for sharing it!

Take care, Elli