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A stochastic-dominance approach to determining the optimal home-size purchase: The case of Hong Kong

Tsang, Chun-Kei and Wong, Wing-Keung and Horowitz, Ira (2016): A stochastic-dominance approach to determining the optimal home-size purchase: The case of Hong Kong.

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Abstract

We demonstrate how a prospective buyer’s optimal home-size purchase can be determined by means of a stochastic-dominance (SD) analysis of historical data. Using monthly property yields in Hong Kong over a 15-year period to illustrate our procedure, and as a case in point to demonstrate the efficacy of the SD approach, we show that regardless of whether the buyer eschews risk, embraces risk, or is indifferent to it, in any adjacent pairing of five well-defined housing classes, the smaller class provides the optimal purchase, and thus that the smallest class affords the buyer the optimal purchase over all classes in this important housing market – at least where rental yields are of primary concern. In addition, we find that risk averters focusing on total yield would prefer to invest in the smallest and second- smallest classes than in the largest class.

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