A model for pricing real estate derivatives with stochastic interest rates
AbstractThe real estate derivatives market allows participants to manage risk and return from exposure to property, without buying or selling directly the underlying asset. Such market is growing very fast hence the need to rely on simple yet effective pricing models is very great. In order to take into account the real estate market sensitivity to the interest rate term structure in this paper is presented a two-factor model where the real estate asset value and the spot rate dynamics are jointly modeled. The pricing problem for both European and American options is then analyzed and since no closed-form solution can be found a bidimensional binomial lattice framework is adopted. The model proposed allows calibration to the interest rate and volatility term structures.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 9924.
Date of creation: 08 Aug 2008
Date of revision:
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- Frank Fabozzi & Robert Shiller & Radu Tunaru, 2009. "Property Derivatives for Managing European Real-Estate Risk," Yale School of Management Working Papers amz2652, Yale School of Management, revised 01 Sep 2009.
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