New research by Professor Radu Tunaru and collaborators proposes a new pricing framework for real estate derivatives. The findings are published in European Financial Management (Fabozzi, Shiller and Tunaru, 2012).
A summary of the project follows:
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.
For more information please contact r.tunaru@kent.ac.uk.