A Note on the Pricing of Real Estate Index Linked Swaps
AbstractIn this paper we discuss the pricing of commercial real estate index linked swaps (CREILS). This particular pricing problem has been studied by Buttimer et al. (1997) in a previous paper. We show that their results are only approximately correct and that the true theoretical price of the swap is in fact equal to zero. This result is shown to hold regardless of the specific model chosen for the index process, the dividend process, and the interest rate term structure. We provide an intuitive economic argument as well as a full mathematical proof of our result. In particular we show that the nonzero result in the previous paper is due to two specific numerical approximations introduced in that paper, and we discuss these approximation errors from a theoretical as well as from a numerical point of view.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 492.
Length: 14 pages
Date of creation: 13 Feb 2002
Date of revision:
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Real estate; index linked swaps; arbitrage;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-03-14 (All new papers)
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.:
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- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- Drouhin, Pierre-Arnaud, 2012. "Caractéristiques statistiques et dynamique de prix des produits dérivés immobiliers," Open Access publications from UniversitÃ© Paris-Dauphine urn:hdl:123456789/10918, Université Paris-Dauphine.
- Juerg Syz & Paolo Vanini, 2011. "Arbitrage Free Price Bounds for Property Derivatives," The Journal of Real Estate Finance and Economics, Springer, vol. 43(3), pages 281-298, October.
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