Hedging and Pricing Rent Risk with Search Frictions

44 Pages Posted: 18 Jul 2017 Last revised: 27 Jul 2017

See all articles by Briana Chang

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Hyun-Soo Choi

KAIST College of Business

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Jeffrey D. Kubik

Syracuse University - Department of Economics

Date Written: July 11, 2017

Abstract

The desire of risk-averse households to hedge rent risk is thought to increase home ownership and prices. While evidence for the ownership implication is compelling, support for the price effect is mixed. We show that an important reason is search frictions. Rent risk reduces outside options, leading to less-picky buyers and worse home/buyer matches. This attenuates the rise in the price-to-rent ratio that would otherwise occur without frictions. Consistent with our model, a house remains on the market for fewer days when rent risk is higher. Accounting for frictions significantly increases the effect of rent risk on home prices.

Keywords: Rent Risk, Hedging, House Prices, Search Frictions, Seasonality

JEL Classification: G1, R3

Suggested Citation

Chang, Briana and Choi, Hyun-Soo and Hong, Harrison G. and Kubik, Jeffrey D., Hedging and Pricing Rent Risk with Search Frictions (July 11, 2017). Available at SSRN: https://ssrn.com/abstract=3000583 or http://dx.doi.org/10.2139/ssrn.3000583

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States

Hyun-Soo Choi

KAIST College of Business ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul
Korea, Republic of (South Korea)
8229583592 (Phone)

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey D. Kubik

Syracuse University - Department of Economics ( email )

426 Eggers Hall
Syracuse, NY 13244-1020
United States
315-443-9063 (Phone)
315-443-1081 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
119
Abstract Views
1,062
rank
231,553
PlumX Metrics