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Dynamic correlation: A tool hedging house-price risk?

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Author Info

  • Berg, Nathan
  • Gu, Anthony Y.
  • Lien, Donald

Abstract

Dynamic correlation models demonstrate that the relationship between interest rates and housing prices is non-constant. Estimates reveal statistically significant time fluctuations in correlations between housing price indexes and Treasury bonds, the S&P 500 Index, and stock prices of mortgage-related companies. In some cases, hedging effectiveness can be improved by moving from constant to dynamic hedge ratios. Empirics reported here point to the possibility that incorrect assumptions of constant correlation could lead to mis-pricing in the mortgage industry and beyond.

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File URL: http://mpra.ub.uni-muenchen.de/26368/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26368.

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Date of creation: 2007
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Publication status: Published in Journal of Real Estate Portfolio Management 1.13(2007): pp. 17-28
Handle: RePEc:pra:mprapa:26368

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Related research

Keywords: Real Estate; Time-Varying Risk; Time-Dependent Variance; Risk Premium; Risk Aversion; Housing Risk; Portfolio Choice; Ecological Rationality; Behavioral Economics; Bounded Rationality;

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References

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  1. Christofi, A. & Pericli, A., 1999. "Correlation in price changes and volatility of major Latin American stock markets," Journal of Multinational Financial Management, Elsevier, vol. 9(1), pages 79-93, January.
  2. Joseph Gyourko & Donald B. Keim, . "What Does the Stock Market Tell Us About Real Estate Returns? (Revision of 18-91) (Reprint 030)," Rodney L. White Center for Financial Research Working Papers 11-92, Wharton School Rodney L. White Center for Financial Research.
  3. Robert J. Shiller & Karl E. Case & Allan N. Weiss, 1995. "Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate," Cowles Foundation Discussion Papers 1098, Cowles Foundation for Research in Economics, Yale University.
  4. Kari Takala & Pekka Pere, 1991. "Testing the cointegration of house and stock prices in Finland," Finnish Economic Papers, Finnish Economic Association, vol. 4(1), pages 33-51, Spring.
  5. Nathan Berg, 2003. "Hedging housing risk in the new economy: is there a connection, and should firms care?," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 5(1), pages 10-36.
  6. Ball, Clifford A. & Torous, Walter N., 2000. "Stochastic correlation across international stock markets," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 373-388, November.
  7. Goetzmann, W.N., 1990. "The Single Family Home In The Investment Portfolio," Papers fb-_90-15, Columbia - Graduate School of Business.
  8. John Okunev & Patrick J. Wilson, 1997. "Using Nonlinear Tests to Examine Integration Between Real Estate and Stock Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 487-503.
  9. Ball, Clifford A. & Torous, Walter N., 2000. "Stochastic Correlation Across International Stock Markets," University of California at Los Angeles, Anderson Graduate School of Management qt6vn9q79w, Anderson Graduate School of Management, UCLA.
  10. Robert J. Shiller, 1991. "Arithmetic Repeat Sales Price Estimators," Cowles Foundation Discussion Papers 971, Cowles Foundation for Research in Economics, Yale University.
  11. Joseph Gyourko & Donald B. Keim, 1992. "What Does the Stock Market Tell Us About Real Estate Returns?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(3), pages 457-485.
  12. Tse, Y. K., 2000. "A test for constant correlations in a multivariate GARCH model," Journal of Econometrics, Elsevier, vol. 98(1), pages 107-127, September.
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Cited by:
  1. Anton Bekkerman, 2011. "Time-varying hedge ratios in linked agricultural markets," Agricultural Finance Review, Emerald Group Publishing, vol. 71(2), pages 179-200, July.
  2. repec:ebl:ecbull:v:13:y:2007:i:1:p:1-7 is not listed on IDEAS

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