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

Author

Listed:
  • Li Bao
  • Mingyan Cheung
  • Stephan Unger

Abstract

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.

Suggested Citation

  • Li Bao & Mingyan Cheung & Stephan Unger, 2016. "Does Hedging Matter for Household Finance? Evidence from Hedging Housing Price Risks with Exchange Traded Options," ERES eres2016_284, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2016_284
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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