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Dynamic Correlation: A Tool for Hedging House Price Risk?

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  • Nathan Berg
  • Anthony Gu
  • Donald Lien

Abstract

Executive Summary. 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.

Suggested Citation

  • Nathan Berg & Anthony Gu & Donald Lien, 2007. "Dynamic Correlation: A Tool for Hedging House Price Risk?," Journal of Real Estate Portfolio Management, Taylor & Francis Journals, vol. 13(1), pages 17-28, January.
    • Handle: RePEc:taf:repmxx:v:13:y:2007:i:1:p:17-28
    DOI: 10.1080/10835547.2007.12089766
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    References listed on IDEAS

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