Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate | Zendy

Karl E. Case | Zendy; Robert J. Shiller | Zendy; Allan N. Weiss | Zendy

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Mortgage Default Risk and Real Estate Prices: The Use of Index-Based Futures and Options in Real Estate

Author(s) -

Karl E. Case,

Robert J. Shiller,

Allan N. Weiss

Publication year - 1995

Publication title -

risk management

Language(s) - English

Resource type - Reports

DOI - 10.3386/w5078

Subject(s) - index (typography) , real estate , futures contract , commercial mortgage backed security , business , financial economics , default risk , real estate investment trust , actuarial science , capitalization rate , economics , finance , credit risk , computer science , world wide web

Evidence is shown, using US foreclosure data by state 1975-93, that periods of high default rates on home mortgages strongly tend to follow real estate price declines or interruptions in real estate price increase. The relation between price decline and foreclosure rates is modelled using a distributed lag. Using this model, holders of residential mortgage portfolios could hedge some of the risk of default by taking positions in futures or options markets for residential real estate prices, were such markets to be established.

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