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Paper eres2016_284:
Does Hedging Matter for Household Finance? Evidence from Hedging Housing Price Risks with Exchange Traded Options

id eres2016_284
authors Bao, Li; Mingyan Cheung; Stephan Unger
year 2016
title Does Hedging Matter for Household Finance? Evidence from Hedging Housing Price Risks with Exchange Traded Options
source 23rd Annual European Real Estate Society Conference in Regensburg, Germany
summary Hedging activities with housing derivative is rare. In this paper we analyze the benefits of hedging downside risk of housing prices to U.S. home owners using the standard exchange traded option contracts on a set of well developed U.S. home price indices. Guided by a simple recurrence model, we derive a set of inter-temporal relations between hedging benefits, interest costs and wages of a home owner. Using comprehensive data of derivative markets of the S&P Case-Shiller Home Price Index, we estimate a hedging benefit of around 6% of her estimated house value. For an ordinary U.S. home owner this would be ten times her option costs. We extend this estimation to forced home seller to strategic home seller. This benefit is robust to other simulated option series with a variety of expiries and sizes of income shocks. We find that the use of exchange traded housing derivatives could generate significant saving that should be explored by all U.S. households. Further we find that improvement of the housing derivatives market liquidity would increase generated savings.
series ERES:conference
type paper session
discussion No discussions. Post discussion ...
ratings
session Residential Real Estate
last changed 2017/11/18 16:16
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