Dynamic correlation: A tool hedging house-price risk?

Nathan Berg, Anthony Y. Gu and Donald Lien

MPRA Paper from University Library of Munich, Germany

Abstract: Dynamic correlation models demonstrate that the relationship between interest rates and housing prices is non-constant. Estimates reveal statistically significant time fluctuations in correlations between housing price indexes and Treasury bonds, the S&P 500 Index, and stock prices of mortgage-related companies. In some cases, hedging effectiveness can be improved by moving from constant to dynamic hedge ratios. Empirics reported here point to the possibility that incorrect assumptions of constant correlation could lead to mis-pricing in the mortgage industry and beyond.

Keywords: Real Estate; Time-Varying Risk; Time-Dependent Variance; Risk Premium; Risk Aversion; Housing Risk; Portfolio Choice; Ecological Rationality; Behavioral Economics; Bounded Rationality (search for similar items in EconPapers)
JEL-codes: D03 R30 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

Published in Journal of Real Estate Portfolio Management 1.13(2007): pp. 17-28

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:26368

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