Hedging House Price Risk with CME Futures Contracts: The Case of Las Vegas Residential Real Estate

Posted: 1 Oct 2008

See all articles by Mark Bertus

Mark Bertus

Auburn University

Harris Hollans

Auburn University - College of Business

Steve Swidler

Lafayette College - Department of Economics & Business; Auburn University - College of Business

Date Written: September, 30 2008

Abstract

Until the recent introduction of real estate futures on the Chicago Mercantile Exchange (CME), there have been few opportunities to manage house price risk. This paper examines whether house price risk can be effectively hedged in Las Vegas, one of the CME contract cities. The analysis considers hedging from the viewpoint of real estate investment groups, mortgage portfolio investors, builder/developers and individual homeowners. For investment groups and mortgage holders holding a mix of new and existing home assets, CME futures would have reduced house price risk by more than 88% over the 1994-2006 period. Similarly, homeowners implicitly hedging price volatility of existing homes also would have fared well over the sample period. However, builder/developers worried about new home price appreciation would have been much less successful in managing their risk. One important caveat, minimum variance hedge ratios change over time and may cause hedge performance to suffer.

Keywords: hedging, risk management, housing, residential real estate

JEL Classification: G13, R31

Suggested Citation

Bertus, Mark and Hollans, Harris and Swidler, Steve M., Hedging House Price Risk with CME Futures Contracts: The Case of Las Vegas Residential Real Estate (September, 30 2008). Journal of Real Estate Finance and Economics, Vol. 37, No. 3, 2008. Available at SSRN: https://ssrn.com/abstract=1275840

Mark Bertus

Auburn University ( email )

415 W Magnolia
Lowder rm 303
Auburn, AL 36849
United States

Harris Hollans

Auburn University - College of Business ( email )

Department of Finance
303 Lowder Business Bldg.
Auburn University, AL 36849
United States
(334) 844-3009 (Phone)
(334)844-4960 (Fax)

Steve M. Swidler (Contact Author)

Lafayette College - Department of Economics & Business ( email )

Easton, PA 18042
United States
610-330-5303 (Phone)

Auburn University - College of Business ( email )

Auburn, AL 36849
United States

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