Pricing of Presale Contracts with Macroeconomic Factors and Stochastic Basis Risk

This study analyzes the stochastic basis risk (presale price minus spot housing price) of presale housing from the viewpoint of forward pricing. We employ the modified Brownian bridge process to deal with the time-varying volatility and price convergence of presale and existing houses. The finding r...

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Bibliographic Details
Published in:The Journal of real estate research 2020-01, Vol.42 (4), p.531-551
Main Authors: Yang, Chih-Yuan, Chen, Ming-Chi, Chang, Chia-Chien
Format: Article
Language:English
Subjects:
Basis
Convergence
Futures
Hedging
Housing
Housing market
Housing prices
Investments
Literature reviews
Macroeconomics
Pessimism
Prices
Real estate financing
Volatility
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Summary:This study analyzes the stochastic basis risk (presale price minus spot housing price) of presale housing from the viewpoint of forward pricing. We employ the modified Brownian bridge process to deal with the time-varying volatility and price convergence of presale and existing houses. The finding reveals an asymmetric effect of macroeconomic factors on the presale price in different market conditions. Such results might reflect the investors' behaviors of overreaction and/or over-pessimism. In addition, the influence of macroeconomic variables is greater on the basis price than on the prices of existing houses, especially in a depressed housing market. Our results emphasize the importance of considering basis risk and the influence of macroeconomic factors when pricing presale houses to manage housing risk.
ISSN:0896-5803
2691-1175
DOI:10.1080/08965803.2020.1846324