Mortgage Put Options and Real Estate Markets
Andrey D. Pavlov
Simon Fraser University (SFU) - Finance Area
Susan M. Wachter
University of Pennsylvania - Wharton School, Department of Real Estate
October 16, 2008
Journal of Real Estate Finance and Economics, Vol. 38, No. 1, 2009
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.
Keywords: real estate bubble, mortgage lending put options, Asian financial crisis
JEL Classification: G21Accepted Paper Series
Date posted: October 20, 2008
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