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
Date Written: 2007
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: Suggested Citation