Another application of call options: Explaining the divergence between the housing market and the rental market

Hung-Wei Lee, Che-Chun Lin and I-Chun Tsai

Finance Research Letters, 2023, vol. 53, issue C

Abstract: This paper proposes a model to discuss the influence of investors’ expectations on the equilibrium of rents and user costs. We treat volatility as a representing indicator of investors’ expectations and use call options as a proxy. We modify the traditional equilibrium by adding an option and use the cointegration test to verify whether the option value can explain the deviation between rents and user costs. The results show that the impact of volatility on the equilibrium of rents and user costs should not be neglected, and the value of real options can effectively measure the effect of volatility.

Keywords: Call options; Expectations of investors; Rents; User costs; Volatility (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:53:y:2023:i:c:s154461232300034x

DOI: 10.1016/j.frl.2023.103660

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