30 year perspective on property derivatives_Fabozzi_Shiller (2020) Flashcards
What is the problem of the paper on propert derivatives?
Market for propert derivatives is in a state of infancy.
What are the derivative advantages on information?
One can infer information about the future of evolution of property prices from derivatives.
What advantage comes from derivatives in hedging housing price risk?
More insurance products can be offered, like insurance that you will not lose the value of the down payment and even price guarantees
Banks can hedge against default risk that jumps when housing prices fall
Young households can buy futures if housing prices in an area grow faster than their income
What is the derivative advantage on exposure?
One can get exposure to real estate without owning it (diversification)
Can you design a reverse mortgage?
Yes, a put option on houses would benefit this market against declines in prices (negative equity)
How did need for derivatives arose in 1970?
Acceleration of property price growth, before they were rising mostly slowly
Unpreparedness of covered mortgages and mortgage-backed securities for elevated inflation of 1970s
Shift to adjustable rate mortgages; previously, mortgages have been balloon payments
How index construction mismatch is an obstacle to derivatives?
There are various ways how to measure real estate market value (new sales or listed prices, regional, national)
Matching the timing of the real estate index to property derivatives
Why negligible liquidity(who would be willing to provide insurance against fall in prices?) is an obstacle?
On the sell side are all those concerned about a possible price decline - no question there will be demand
On buy side? Youngsters who want to hedge against too much housing price increase are likely too few of them
How modelling considerations are obstacle to derivatives?
Arbitrage condition is not a good condition for real estate derivatives, so creating a pricing model is a challenge
What are regulatory issues as obstacles?
As a result of GHC and Basel III Accors, trading property derivatives became very capital-intensive for banks, so they quit the market
