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Real Estate, the External Finance Premium and Business Investment: A Quantitative Dynamic General Equilibrium Analysis

Real Estate Economics, Forthcoming

Posted: 17 Nov 2010  

Yi Jan

Monash University

Charles K. Leung

City University of Hong Kong

Zhixiong Zeng

Monash University

Date Written: November 16, 2010

Abstract

This paper studies the connection between the capital market and the real estate market. Empirically, we find that positive real house price shocks lower the external finance premium and stimulate nonresidential investment and real GDP. Our theoretical framework is able to mimic the volatility of the external finance premium, the relative price of real estate and capital, and the investment in real estate and capital. It also captures the cyclicality of the external finance premium and of real estate prices. The contribution of real estate price fluctuations to the variability of the external finance premium and the GDP is confirmed to be significant.

Keywords: External Finance Premium, Residential and Corporate Real Estate, Capital Market Imperfections, Equilibrium Default, Real Estate Price Volatility

JEL Classification: E44, D82, R21, R31

Suggested Citation

Jan, Yi and Leung, Charles K. and Zeng, Zhixiong, Real Estate, the External Finance Premium and Business Investment: A Quantitative Dynamic General Equilibrium Analysis (November 16, 2010). Real Estate Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1710093

Yi Jan

Monash University ( email )

Wellington Road
Victoria, Roodepoort 3145
Australia

Charles Ka Yui Leung (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Zhixiong Zeng

Monash University ( email )

Department of Economics
Monash University
Caulfield East, Victoria 3145
Australia
+61-3-99034045 (Phone)
+61-3-99031128 (Fax)

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