A Pricing Framework for Real Estate Derivatives

28 Pages Posted: 20 Oct 2012

See all articles by Frank J. Fabozzi

Frank J. Fabozzi

EDHEC Business School

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Radu Tunaru

University of Sussex

Date Written: November 2012

Abstract

New methods are developed here for pricing the main real estate derivatives — futures and forward contracts, total return swaps, and options. Accounting for the incompleteness of this market, a suitable modelling framework is outlined that can produce exact formulae, assuming that the market price of risk is known. This framework can accommodate econometric properties of real estate indices such as predictability due to autocorrelations. The term structure of the market price of risk is calibrated from futures market prices on the Investment Property Databank index. The evolution of the market price of risk associated with all five futures curves during 2009 is discussed.

Keywords: derivatives pricing, real estate indices, incomplete markets, market price of risk, serial correlation

JEL Classification: G13, G15, G20

Suggested Citation

Fabozzi, Frank J. and Shiller, Robert J. and Tunaru, Radu, A Pricing Framework for Real Estate Derivatives (November 2012). European Financial Management, Vol. 18, Issue 5, pp. 762-789, 2012, Available at SSRN: https://ssrn.com/abstract=2164035 or http://dx.doi.org/10.1111/j.1468-036X.2011.00635.x

Frank J. Fabozzi (Contact Author)

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Robert J. Shiller

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3708 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://www.econ.yale.edu/~shiller/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
203-432-3708 (Phone)

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States
203-432-3708 (Phone)
203-432-6167 (Fax)

Radu Tunaru

University of Sussex ( email )

Jubilee
Brighton, BN1 9SL
United Kingdom

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