Arbitrage opportunities, efficiency, and the role of risk preferences in the Hong Kong property market

Chun-Kei Tsang, Wing-Keung Wong and Ira Horowitz

Studies in Economics and Finance, 2016, vol. 33, issue 4, 735-754

Abstract: Purpose - This paper aims to investigate how a prospective buyer’s optimal home-size purchase can be determined by means of a stochastic-dominance (SD) analysis of the historical data of Hong Kong. Design/methodology/approach - By means of SD analysis, the paper uses monthly property yields in Hong Kong over a 15-year period to illustrate how buyers of different risk preference may optimize their home-size purchase. Findings - 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. In addition, risk-averters focusing on total yield would prefer to invest in the smallest and second-smallest classes than in the largest class. Research limitations/implications - As the smaller class provides the optimal purchase, 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. Practical implications - The findings suggest that in the Hong Kong housing market, long-term investors may be better off purchasing smaller homes. For other type of investors, it depends on their risk preference. Originality/value - There is a very small body of empirical literature on housing investment, especially if the focus is on the optimal home-size purchase.

Keywords: Urban studies; Stochastic dominance; Housing investment; Investors with S-shaped and reverse S-shaped utilities; Risk averters; Risk seekers (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (29)

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Working Paper: Arbitrage Opportunities, Efficiency, and the Role of Risk Preferences in the Hong Kong Property Market (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:v:33:y:2016:i:4:p:735-754

DOI: 10.1108/SEF-03-2015-0079

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