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A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?

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  • Frank J. Fabozzi
  • Robert J. Shiller
  • Radu S. Tunaru

Abstract

The housing sector is the largest spot market in the world without a developed derivative contract to serve the risk management needs of market participants. This paper describes the evolution within a wider economic context of property derivatives in the United States and worldwide. We review various economic arguments presented in the literature to highlight the advantages of these financial instruments to society. The paper also provides a critical perspective on the principal obstacles hindering the development of property derivatives based on real estate prices—especially housing prices—and what can be done to overcome these difficulties. The issues discussed can serve as a guide for designing property derivatives capable of hedging real estate risk that has resurfaced time and time again in financial crises.

Suggested Citation

  • Frank J. Fabozzi & Robert J. Shiller & Radu S. Tunaru, 2020. "A 30-Year Perspective on Property Derivatives: What Can Be Done to Tame Property Price Risk?," Journal of Economic Perspectives, American Economic Association, vol. 34(4), pages 121-145, Fall.
    • Handle: RePEc:aea:jecper:v:34:y:2020:i:4:p:121-45
    DOI: 10.1257/jep.34.4.121
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    1. Liu, Lu, 2023. "The demand for long-term mortgage contracts and the role of collateral," Bank of England working papers 1009, Bank of England.
    2. Liu, Lu, 2023. "The demand for long-term mortgage contracts and the role of collateral," ESRB Working Paper Series 142, European Systemic Risk Board.

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    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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