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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

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File URL: http://hdl.handle.net/10.1007/s11146-008-9144-0
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Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 38 (2009)
Issue (Month): 1 (January)
Pages: 89-103

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Handle: RePEc:kap:jrefec:v:38:y:2009:i:1:p:89-103
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102945

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  1. 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.
  2. John Krainer & Chishen Wei, 2004. "House prices and fundamental value," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct1.
  3. Winston T.H. Koh & Roberto S. Mariano & Andrey Pavlovb & Sock Yong Phang & Augustine H. H. Tan & Susan M. Wachter, 2006. "Underpriced Default Spread Exacerbates Market Crashes," Finance Working Papers 22458, East Asian Bureau of Economic Research.
  4. 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.
  5. Franklin Allen, 2001. "Presidential Address: Do Financial Institutions Matter?," Journal of Finance, American Finance Association, vol. 56(4), pages 1165-1175, 08.
  6. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08.
  7. 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.
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