Mortgage Put Options and Real Estate Markets |
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Authors: | Andrey Pavlov Susan Wachter |
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Institution: | (1) The Wharton School, University of Pennsylvania, Pennsylvania, PA, USA;(2) Simon Fraser University, Burnaby, Canada |
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Abstract: | In this paper we offer direct evidence that financial intermediation does impact underlying asset markets. We develop a specific
observable symptom of a banking system that underprices the put option imbedded in non-recourse asset-backed lending. Using
a dataset for 19 countries and over 500 real estate investment trusts, we find that, following a negative demand shock, the
“underpricing” economies experience far deeper asset market crashes than economies in which the put option is correctly priced.
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Keywords: | Real estate bubble Mortgage lending put options Asian financial crisis |
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