A Pricing Framework for Real Estate Derivatives |
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| Authors: | Frank J. Fabozzi Robert J. Shiller Radu S. Tunaru |
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| Affiliation: | 1. EDHEC Business School and EDHEC Risk Institute, 400 Promenade des Anglais, BP 3116 06202 Nice Cedex 3, France E‐mail: frank.fabozzi@edhec.edu;2. Yale University, New Haven, CT USA and MacroMarkets LLC E‐mail: robert.shiller@yale.edu;3. University of Kent, Canterbury, Kent Business School, Park Wood Road, CT2 7PE, UK E‐mail: r.tunaru@kent.ac.uk |
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| Abstract: | New methods are developed here for pricing the main real estate derivatives — futures and forward contracts, total return swaps, and options. Accounting for the incompleteness of this market, a suitable modelling framework is outlined that can produce exact formulae, assuming that the market price of risk is known. This framework can accommodate econometric properties of real estate indices such as predictability due to autocorrelations. The term structure of the market price of risk is calibrated from futures market prices on the Investment Property Databank index. The evolution of the market price of risk associated with all five futures curves during 2009 is discussed. |
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| Keywords: | derivatives pricing real estate indices incomplete markets market price of risk serial correlation G13 G15 G20 |
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