Mortgage Put Options and Real Estate Markets
Posted: 20 Oct 2008
Date Written: October 16, 2008
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: G21
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