Dynamic correlation: A tool hedging house-price risk?

Berg, Nathan and Gu, Anthony Y. and Lien, Donald (2007): Dynamic correlation: A tool hedging house-price risk? Published in: Journal of Real Estate Portfolio Management , Vol. 13, No. 1 (2007): pp. 17-28.

Abstract

Dynamic correlation models demonstrate that the relationship between interest rates and housing prices is non-constant. Estimates reveal statistically significant time fluctuations in correlations between housing price indexes and Treasury bonds, the S&P 500 Index, and stock prices of mortgage-related companies. In some cases, hedging effectiveness can be improved by moving from constant to dynamic hedge ratios. Empirics reported here point to the possibility that incorrect assumptions of constant correlation could lead to mis-pricing in the mortgage industry and beyond.

• Item Type: MPRA Paper
• Language: English
• Keywords: Real Estate, Time-Varying Risk, Time-Dependent Variance, Risk Premium, Risk Aversion, Housing Risk, Portfolio Choice, Ecological Rationality, Behavioral Economics, Bounded Rationality
• Subjects: D - Microeconomics > D0 - General > D03 - Behavioral Microeconomics: Underlying Principles; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location > R30 - General

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