Risk-Neutral Valuation of Real Estate Derivatives

Netspar Discussion Paper No. 10/2009-048

Ortec Finance Research Center Technical Paper No. 2009-02

https://doi.org/10.3905/jod.2015.23.1.089

Posted: 20 May 2019

See all articles by David van Bragt

David van Bragt

Ortec Finance

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB); Ortec Finance

Bert Kramer

Ortec Finance

Antoon Pelsser

Maastricht University; Netspar

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2009

Abstract

We propose a novel and intuitive risk-neutral valuation model for real estate derivatives. We first model the underlying efficient market price of real estate and then construct the observed index value with an adaptation of the price update rule by Blundell and Ward (1987). The resulting index behavior can easily be analyzed and closed-form pricing solutions are derived for forwards, swaps and European put and call options. We demonstrate the application of the model by valuing a put option on a house price index. Autocorrelation in the index returns appears to have a large impact on the option value. We also study the effect of an over- or undervalued real estate market. The observed effects are significant and as expected.

Keywords: Real Estate Derivatives, Option Pricing, Incomplete Markets, Price Discovery, Autoregressive Models, Seasonality, Stochastic Volatility

JEL Classification: C51, D52, G13

Suggested Citation

Bragt, David van and Francke, Marc and Kramer, Bert and Pelsser, Antoon A. J., Risk-Neutral Valuation of Real Estate Derivatives (October 1, 2009). Netspar Discussion Paper No. 10/2009-048; https://doi.org/10.3905/jod.2015.23.1.089. Available at SSRN: https://ssrn.com/abstract=1576624 or http://dx.doi.org/10.2139/ssrn.1576624

David van Bragt

Ortec Finance ( email )

Max Euwelaan 78
Rotterdam, 3062 MA
Netherlands
+31 (0)10 498 66 66 (Phone)
+31 (0)10 498 66 67 (Fax)

HOME PAGE: http://www.ortec-finance.com

Marc Francke

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands

HOME PAGE: http://www.uva.nl/en/contact/staff/item/m.k.francke.html?f=francke

Ortec Finance ( email )

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Bert Kramer

Ortec Finance ( email )

Orly Centre
Barajasweg 10
Amsterdam, 1043 CP
Netherlands

Antoon A. J. Pelsser (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

HOME PAGE: http://https://sites.google.com/site/apelsseraca/

Netspar ( email )

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Tilburg, 5000 LE
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