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On Option‐Pricing Models in Real Estate: A Critique

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  • James D. Shilling
  • C.F. Sirmans
  • John D. Benjamin

Abstract

This paper considers the problems peculiar to options on real estate, because of the special set of institutional factors influencing real estate markets. It is intended to serve as a reply to Johnson and Wofford [15] as well as provide an overall critique of option‐pricing models in a real estate context. Our major point is that a variety of real estate decisions, such as the abandonment decision, the option to refinance, or the option to exercise a contingent real estate purchase contract, may be modeled using option‐pricing techniques. However, both the theoretical and institutional aspects of real estate markets must be taken into account in both developing and applying option models in a real estate context.

Suggested Citation

  • James D. Shilling & C.F. Sirmans & John D. Benjamin, 1987. "On Option‐Pricing Models in Real Estate: A Critique," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(1), pages 742-752, March.
    • Handle: RePEc:bla:reesec:v:15:y:1987:i:1:p:742-752
    DOI: 10.1111/1540-6229.00414
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    References listed on IDEAS

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    1. Patric H. Hendershott, 1985. "Pricing Adjustable Rate Mortgages," NBER Working Papers 1548, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Sainam, Preethika & Balasubramanian, Sridhar & Bhattacharya, Shantanu & Ong, L. Lin, 2023. "Pricing under uncertainty: Forward and option pricing in sports markets," Journal of Business Research, Elsevier, vol. 167(C).
    2. L.M. Farrell, 1988. "Hedged Real Estate Portfolios and the Wealth Redistribution Effect of Real Estate Option," Urban Studies, Urban Studies Journal Limited, vol. 25(6), pages 507-519, December.

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