Valuation of Housing Index Derivatives
This paper studies the housing index derivatives which are traded at the Chicago Mercantile Exchange (CME). First, we show that there exists a great potential benefit of using the CME housing index derivatives for asset allocation and portfolio management. Second, we propose and implement an equilibrium valuation framework for the housing index derivatives, to handle the illiquid nature of the underlying residential housing market. Based on the CRRA utility and a mean-reverting process for the aggregate dividend, we show that these derivatives prices depend only on the parameters for the underlying housing index, the interest rate and their correlation. We analytically and numerically examine the risk premiums for the CME futures and options. Three important observations are drawn from the analysis. First, the risk premiums are significant for all futures and options contracts with maturities longer than one year. Second, the expected growth rate of the underlying housing index is the key determinant for the magnitude of the risk premium. Third, the risk premiums can be positive or negative, depending on the whether the expected growth rate of the underlying index is higher than the riskfree yield-to-maturity.
illiquid residential housing market housing index derivatives valuation and risk premium
Melanie Cao Jason Wei
Schulich School of Business York University Toronto, Ontario, Canada, M3J 1P3 Joseph L. Rotman School of Management University of Toronto Toronto, Ontario, Canada, M5S 3E6
国际会议
广州
英文
1-51
2009-07-07（万方平台首次上网日期，不代表论文的发表时间）