Post by Sapphire Capital on Feb 11, 2009 7:47:27 GMT 4
The Price Spread of Property Derivatives
Juerg M. Syz
Cantonal Bank of Zurich
Paolo Vanini
University of Zurich - Swiss Banking Institute (ISB); Zurich Cantonal Bank
December 29, 2008
Abstract:
Market frictions inhibit perfect replication of property derivatives and define the property spread as a measure in the incomplete real estate market. We identify transaction costs, transaction time and short sale constraints as main frictions in this market. Using these frictions, we derive arbitrage free price bounds for property derivatives. We compare these theoretical bounds with empirically observed derivative prices and estimate the values of the frictions. These values are reasonable in the context of other research and market observations. Further, we investigate the value of the property spread using a general equilibrium model. The property spread and its characteristics are driven by agents who differ in their aversion to ambiguity. We derive asymptotic equilibrium policies and consider their impact on the property spread.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1322045_code265735.pdf?abstractid=1321445&mirid=1
Juerg M. Syz
Cantonal Bank of Zurich
Paolo Vanini
University of Zurich - Swiss Banking Institute (ISB); Zurich Cantonal Bank
December 29, 2008
Abstract:
Market frictions inhibit perfect replication of property derivatives and define the property spread as a measure in the incomplete real estate market. We identify transaction costs, transaction time and short sale constraints as main frictions in this market. Using these frictions, we derive arbitrage free price bounds for property derivatives. We compare these theoretical bounds with empirically observed derivative prices and estimate the values of the frictions. These values are reasonable in the context of other research and market observations. Further, we investigate the value of the property spread using a general equilibrium model. The property spread and its characteristics are driven by agents who differ in their aversion to ambiguity. We derive asymptotic equilibrium policies and consider their impact on the property spread.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1322045_code265735.pdf?abstractid=1321445&mirid=1