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Mortgage Put Options and Real Estate Markets


  • Andrey Pavlov


  • Susan Wachter



In this paper we offer direct evidence that financial intermediation does impact underlying asset markets. We develop a specific observable symptom of a banking system that underprices the put option imbedded in non-recourse asset-backed lending. Using a dataset for 19 countries and over 500 real estate investment trusts, we find that, following a negative demand shock, the “underpricing” economies experience far deeper asset market crashes than economies in which the put option is correctly priced. Copyright Springer Science+Business Media, LLC 2009

Suggested Citation

  • Andrey Pavlov & Susan Wachter, 2009. "Mortgage Put Options and Real Estate Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 38(1), pages 89-103, January.
  • Handle: RePEc:kap:jrefec:v:38:y:2009:i:1:p:89-103 DOI: 10.1007/s11146-008-9144-0

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    References listed on IDEAS

    1. John Krainer & Chishen Wei, 2004. "House prices and fundamental value," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct1.
    2. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, August.
    3. Andrey Pavlov & Susan M. Wachter, 2006. "The Inevitability of Marketwide Underpricing of Mortgage Default Risk," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 34(4), pages 479-496, December.
    4. Jonathan McCarthy & Richard Peach, 2004. "Are home prices the next "bubble"?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-17.
    5. Winston T. H. Koh & Roberto S. Mariano & Andrey Pavlov & Sock Yong Phang & Augustine H. H. Tan & Susan M. Wachter, 2006. "Underpriced Default Spread Exacerbates Market Crashes," Working Papers 12-2006, Singapore Management University, School of Economics.
    6. Richard J. Herring & Susan Wachter, 1999. "Real Estate Booms and Banking Busts: An International Perspective," Center for Financial Institutions Working Papers 99-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
    7. Franklin Allen, 2001. "Presidential Address: Do Financial Institutions Matter?," Journal of Finance, American Finance Association, vol. 56(4), pages 1165-1175, August.
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    Cited by:

    1. Lambertini, Luisa & Mendicino, Caterina & Teresa Punzi, Maria, 2013. "Leaning against boom–bust cycles in credit and housing prices," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1500-1522.
    2. Susan M. Wachter, 1975. "Comment on "Housing Policy, Mortgage Policy, and the Federal Housing Administration"," NBER Chapters,in: Measuring and Managing Federal Financial Risk, pages 125-130 National Bureau of Economic Research, Inc.
    3. Davidson, Andrew & Levin, Alex & Pavlov, Andrey D. & Wachter, Susan M., 2016. "Why are aggressive mortgage products bad for the housing market?," Journal of Economics and Business, Elsevier, vol. 84(C), pages 148-161.
    4. Marcel Arsenault & Jim Clayton & Liang Peng, 2013. "Mortgage Fund Flows, Capital Appreciation, and Real Estate Cycles," The Journal of Real Estate Finance and Economics, Springer, vol. 47(2), pages 243-265, August.
    5. Levitin, Adam & Wachter, Susan, 2012. "Explaining the Housing Bubble," MPRA Paper 41920, University Library of Munich, Germany.
    6. Wilson, Linus, 2011. "A binomial model of Geithner's toxic asset plan," Journal of Economics and Business, Elsevier, vol. 63(5), pages 349-371, September.

    More about this item


    Real estate bubble; Mortgage lending put options; Asian financial crisis; G21;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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