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Arbitrage Opportunities, Efficiency, and the Role of Risk Preferences in the Hong Kong Property Market

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  • Tsang, Chun-Kei
  • Wong, Wing-Keung
  • Horowitz, Ira

Abstract

This paper aims at investigating how a prospective buyer’s optimal home-size purchase can be determined by means of a stochastic-dominance (SD) analysis of historical data of Hong Kong. By means of SD analysis, the paper employs monthly property yields in Hong Kong over a 15-year period to illustrate how buyers of different risk preference may optimize their home-size purchase. Regardless of whether the buyer eschews risk, embraces risk, or indifference to it, in any adjacent pairing of five well-defined housing classes, the smaller class provides the optimal purchase. In addition, risk averters focusing on total yield would prefer to invest in the smallest and second- smallest classes than in the largest class. As the smaller class provides the optimal purchase, the smallest class affords the buyer the optimal purchase over all classes in this important housing market – at least where rental yields are of primary concern. The findings suggest that in the Hong Kong housing market, long-term investors may be better off purchasing smaller homes. For other type of investors, it depends on their risk preference. There is a very small body of empirical literature on housing investment, especially if focuses on the optimal home-size purchase.

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  • Tsang, Chun-Kei & Wong, Wing-Keung & Horowitz, Ira, 2016. "Arbitrage Opportunities, Efficiency, and the Role of Risk Preferences in the Hong Kong Property Market," MPRA Paper 74347, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:74347
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    Cited by:

    1. Wing-Keung Wong & Hooi Hoi Lean & Michael McAleer & Feng-Tse Tsai, 2018. "Why did Warrant Markets Close in China but not Taiwan?," Tinbergen Institute Discussion Papers 18-051/III, Tinbergen Institute.
    2. repec:gam:jsusta:v:10:y:2018:i:4:p:1128-:d:140258 is not listed on IDEAS
    3. Elie Bouri & Rangan Gupta & Wing-Keung Wong & Zhenzhen Zhu, 2017. "Is Wine a Good Choice for Investment?," Working Papers 201781, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    urban studies; stochastic dominance; risk averters; risk seekers; investors with S-shaped and reverse S-shaped utilities; housing investment;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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