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Index-Based Futures and Options Markets in Real Estate

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Author Info
Karl E. Case (Wellesley College)
Robert J. Shiller () (Cowles Foundation, Yale University)
Allan N. Weiss

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Abstract

Most institutional and individual portfolios are very undiversified in real estate: many hold no real estate at all, many have holdings highly concentrated in certain regions or types of real estate. The risk of these concentrated holdings is not hedged. We propose here that cash-settled futures and options markets be opened on real estate to better allow diversification and hedging, and show that these markets solve problems that have hampered other real estate hedging media in the past. Related institutions, such as home equity insurance, might develop around the futures and options markets. The establishment of these markets is likely to increase the quantity of reproducible real estate, and lower rents on real estate. It may also reduce the amplitude of speculative real estate price movements and dampen the business cycle.

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File URL: http://cowles.econ.yale.edu/P/cd/d10a/d1006.pdf
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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1006.

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Length: 25 pages
Date of creation: Dec 1991
Date of revision:
Handle: RePEc:cwl:cwldpp:1006

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Related research
Keywords: Real estate prices portfolio choice

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Brian R. Horrigan, 1987. "The CPI futures market: the inflation hedge that won't grow," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 3-14.
  2. Gary Gorton & George Pennacchi, 1991. "Security Baskets and Index-Linked Securities," NBER Working Papers 3711, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. N. Gregory Mankiw & David N. Weil, 1990. "The Baby Boom, The Baby Bust, and the Housing Market," NBER Working Papers 2794, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August. [Downloadable!] (restricted)
  5. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, vol. 51(5), pages 1363-87, September. [Downloadable!] (restricted)
  6. Lovell, Michael C & Vogel, Robert C, 1973. "A CPI-Futures Market," Journal of Political Economy, University of Chicago Press, vol. 81(4), pages 1009-12, July-Aug.. [Downloadable!] (restricted)
  7. Powers, Mark J, 1970. "Does Futures Trading Reduce Price Fluctuations in the Cash Markets?," American Economic Review, American Economic Association, vol. 60(3), pages 460-64, June. [Downloadable!] (restricted)
  8. Peck, Anne E, 1976. "Futures Markets, Supply Response, and Price Stability," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 407-23, August. [Downloadable!] (restricted)
  9. Karl E. Case & Robert J. Shiller, 1989. "The Behavior of Home Buyers in Boom and Post-Boom Markets," NBER Working Papers 2748, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Cox, Charles C, 1976. "Futures Trading and Market Information," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1215-37, December. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. François Ortalo-Magné & Matteo Iacoviello, . "Hedging Housing Risk in London," Wisconsin-Madison CULER working papers 02-03, University of Wisconsin Center for Urban Land Economic Research. [Downloadable!]
    Other versions:
  2. Raimond Maurer & Martin Pitzer & Steffen Sebastian, 2004. "Construction of a Transaction-Based Real Estate Index for the Paris Housing Market," Working Paper Series: Finance and Accounting 68, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
    Other versions:
  3. Peter Englund & Min Hwang & John Quigley, 2006. "Hedging Housing Risk," Berkeley Program on Housing and Urban Policy, Working Paper Series 1018, Berkeley Program on Housing and Urban Policy. [Downloadable!]
    Other versions:
  4. Karl E. Case & Robert J. Shiller & Allan N. Weiss, 1995. "Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate," NBER Working Papers 5078, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Robert J. Shiller, 1992. "Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures," Cowles Foundation Discussion Papers 1036, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  6. Robert J. Shiller & Allan N. Weiss, 1994. "Home Equity Insurance," Cowles Foundation Discussion Papers 1074, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  7. Robert J. Shiller & Allan N. Weiss, 1998. "Moral Hazard in Home Equity Conversion," Cowles Foundation Discussion Papers 1177, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  8. Robert J. Shiller, 1993. "Aggregate Income Risks and Hedging Mechanisms," Cowles Foundation Discussion Papers 1048, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  9. Rady, Sven & Ortalo-Magné, François, 2002. "Homeownership," Discussion Papers in Economics 28, University of Munich, Department of Economics. [Downloadable!]
    Other versions:
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