Earthquake Risk Embedded in Property Prices: Evidence from Five Japanese Cities

Tinbergen Institute Discussion Paper 2018-061/III

43 Pages Posted: 1 Aug 2018

See all articles by Masako Ikefuji

Masako Ikefuji

University of Tsukuba

Roger J. A. Laeven

University of Amsterdam - Department of Quantitative Economics (KE)

J.R. Magnus

Vrije Universiteit Amsterdam, School of Business and Economics

Yuan Yue

University of Amsterdam - Amsterdam School of Economics (ASE)

Date Written: July 11, 2018

Abstract

We analyze the impact of short-run and long-run earthquake risk on Japanese property prices. We exploit a rich panel data set of property characteristics, ward attractiveness information, macroeconomic variables, seismic hazard data, and historical earthquake occurrences, supplemented with short-run earthquake probabilities that we generate from a seismic excitation model. We design a hedonic property price model that allows for probability weighting, employ a multivariate error components structure, and develop associated maximum likelihood estimation and variance computation procedures. We find that distorted short-run and long-run earthquake probabilities have a significantly negative impact on property prices. Our approach enables us to identify the total compensation for earthquake risk embedded in property prices and to decompose this into pieces stemming from short-run and long-run risk, and to further decompose this into objective and distorted risk components.

Keywords: Earthquake risk, House price, Seismic excitation, Probability weighting, Hedonic pricing, Multivariate error components

JEL Classification: R20, C33, D81, Q51

Suggested Citation

Ikefuji, Masako and Laeven, Roger Jean Auguste and Magnus, Jan R. and Yue, Yuan, Earthquake Risk Embedded in Property Prices: Evidence from Five Japanese Cities (July 11, 2018). Tinbergen Institute Discussion Paper 2018-061/III. Available at SSRN: https://ssrn.com/abstract=3213289 or http://dx.doi.org/10.2139/ssrn.3213289

Masako Ikefuji (Contact Author)

University of Tsukuba ( email )

Tsukuba University , Ibaraki Ken
Tsukuba, Ibaraki 305-8573, Ibaraki 3050006
Japan

Roger Jean Auguste Laeven

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Valckenierstraat 65-67
Amsterdam, 1018 XE
Netherlands
+31 20 525 4252 (Phone)

HOME PAGE: http://www.rogerlaeven.com

Jan R. Magnus

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Yuan Yue

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

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