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Mortgage Put Options and Real Estate Markets

Posted: 20 Oct 2008  

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Accounting Department

Date Written: October 16, 2008

Abstract

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

Suggested Citation

Pavlov, Andrey D. and Wachter, Susan M., Mortgage Put Options and Real Estate Markets (October 16, 2008). Journal of Real Estate Finance and Economics, Vol. 38, No. 1, 2009. Available at SSRN: https://ssrn.com/abstract=1285517

Andrey D. Pavlov (Contact Author)

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada
604 291 5835 (Phone)
604 291 4920 (Fax)

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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