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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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
This paper has been announced in the following NEP Reports:
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.:
- 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.
- 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.
- Klaus Sandmann & Dieter Sondermann, 1997. "A Note on the Stability of Lognormal Interest Rate Models and the Pricing of Eurodollar Futures," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 119-125.
- D. Sondermann & Sandmann, K., 1994. "On the Stability of Log-Normal Interest Rate Models and the Pricing of Eurodollar Futures," Discussion Paper Serie B 263, University of Bonn, Germany.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.