Arbitrage Opportunities, Efficiency, and the Role of Risk Preferences in the Hong Kong Property Market

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

MPRA Paper from University Library of Munich, Germany

Abstract: This paper aims at investigating how a prospective buyer’s optimal home-size purchase can be determined by means of a stochastic-dominance (SD) analysis of historical data of Hong Kong. By means of SD analysis, the paper employs 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. Regardless of whether the buyer eschews risk, embraces risk, or indifference 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. 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. 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. There is a very small body of empirical literature on housing investment, especially if focuses on the optimal home-size purchase.

Keywords: urban studies; stochastic dominance; risk averters, risk seekers, investors with S-shaped and reverse S-shaped utilities, housing investment (search for similar items in EconPapers)
JEL-codes: C14 G14 R31 (search for similar items in EconPapers)
Date: 2016-05-17
New Economics Papers: this item is included in nep-upt and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Related works:
Journal Article: Arbitrage opportunities, efficiency, and the role of risk preferences in the Hong Kong property market (2016)
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