Do the Forward Sales of Real Estate Stabilize Spot Prices? |
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Authors: | S K Wong C Y Yiu M K S Tse K W Chau |
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Institution: | (1) Department of Real Estate and Construction, The University of Hong Kong, Pokfulam Road, Hong Kong;(2) Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong;(3) School of Economics and Finance, The University of Hong Kong, Porkfulam Road, Hong Kong |
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Abstract: | We examine the effect of forward sale (pre-sale) activities on the volatility of spot prices in the real estate market. The
abundance of pre-sales data and major changes in regulatory control on the pre-sale market during the 90's in Hong Kong allow
us to undertake empirical tests using Hong Kong's real estate data. Our results show that the volatility of spot prices increased
significantly after forward sales were severely dampened by regulatory control measures introduced in 1994, but decreased
again when the measures were partly relaxed in 1998. The results contribute to the long lasting debate on whether the introduction
of a futures market reduces the volatility of spot prices. Previous studies were mainly conducted in markets with low transaction
costs, notably financial markets. By utilizing the unique regulatory changes in the pre-sale market of Hong Kong, we are able
to conduct an experiment on the conditional volatility of spot prices in a high information-cost environment, thereby shedding
light on the important role of forward housing contracts in providing price expectation information for spot trading. |
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Keywords: | Forward contract GARCH model Pre-sale Price volatility |
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