Dynamic Correlation: A Tool for Hedging House Price Risk?

Journal of Real Estate Portfolio Management, Vol. 13, No. 1, pp. 17-28, 2007

12 Pages Posted: 15 Oct 2010

See all articles by Nathan Berg

Nathan Berg

University of Otago, Department of Economics

Anthony Yanxiang Gu

SUNY at Geneseo - John Wiley Jones School of Business

Donald D. Lien

University of Texas at San Antonio - College of Business - Department of Economics

Date Written: 2007

Abstract

Dynamic correlation models demonstrate that the relationship between interest rates and housing prices is non-constant. Estimates reveal statistically significant time fluctuations in correlations between housing price indexes and Treasury bonds, the S&P 500 Index, and stock prices of mortgage-related companies. In some cases, hedging effectiveness can be improved by moving from constant to dynamic hedge ratios. Empirics reported here point to the possibility that incorrect assumptions of constant correlation could lead to mis-pricing in the mortgage industry and beyond.

Keywords: Real Estate, Time-Varying Risk, Time-Dependent Variance, Risk Premium, Risk Aversion, Housing Risk, Portfolio Choice, Ecological Rationality, Behavioral Economics, Bounded Rationality

JEL Classification: D03, R30

Suggested Citation

Berg, Nathan and Gu, Anthony Yanxiang and Lien, Donald, Dynamic Correlation: A Tool for Hedging House Price Risk? (2007). Journal of Real Estate Portfolio Management, Vol. 13, No. 1, pp. 17-28, 2007. Available at SSRN: https://ssrn.com/abstract=1691924

Nathan Berg (Contact Author)

University of Otago, Department of Economics ( email )

P.O. Box 56
Dunedin, Otago 9016
New Zealand

Anthony Yanxiang Gu

SUNY at Geneseo - John Wiley Jones School of Business ( email )

Geneseo, NY 14454
United States

Donald Lien

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

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