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Home Equity Insurance

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Abstract

Home equity insurance policies, policies insuring homeowners against declines in the price of their homes, would bear some resemblance both to ordinary insurance and to financial hedging vehicles. A menu of choices for the design of such policies is presented here, and conceptual issues are discussed. Choices include pass-through futures and options, in which the insurance company in effect serves as a retailer to homeowners of short positions in real estate futures markets or of put options on real estate. Another choice is a life-event-triggered insurance policy, in which the homeowner pays regular fixed insurance premia and is entitled to a claim if both there is a sufficient decline in the real estate price index and a specified life event (such as a move beyond a certain geographical distance) occurs. Pricing of the premia to cover loss experience is derived, and tables of break-even policy premia are shown, based on estimated models of Los Angeles housing prices 1971-91.

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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1074.

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Length: 53 pages
Date of creation: Jul 1994
Date of revision:
Publication status: Published in Journal of Real Estate Finance and Economics (1999), 19(1): 21-47
Handle: RePEc:cwl:cwldpp:1074

Note: CFP 1007.
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Keywords: Real estate risk; Insurance; Hedging; Mortgages;

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  1. Constantinides, George M, 1978. "Market Risk Adjustment in Project Valuation," Journal of Finance, American Finance Association, vol. 33(2), pages 603-16, May.
  2. Karl E. Case & Robert J. Shiller, 1988. "The Efficiency of the Market for Single-Family Homes," NBER Working Papers 2506, National Bureau of Economic Research, Inc.
  3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  4. Karl E. Case & Robert J. Shiller & Allan N. Weiss, 1991. "Index-Based Futures and Options Markets in Real Estate," Cowles Foundation Discussion Papers 1006, Cowles Foundation for Research in Economics, Yale University.
  5. O'Brien, Thomas J & Selby, Michael J P, 1986. "Option Pricing Theory and Asset Expectations: A Review and Discussion in Tribute to James Boness," The Financial Review, Eastern Finance Association, vol. 21(4), pages 399-418, November.
  6. Takatoshi Ito & Keiko Nosse Hirono, 1993. "Efficiency of the Tokyo Housing Market," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(1), pages 1-32, July.
  7. McDonald, Robert & Siegel, Daniel, 1984. " Option Pricing When the Underlying Asset Earns a Below-Equilibrium Rate of Return: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 261-65, March.
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