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The Journal of Derivatives

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Evolution of Real Estate Derivatives and Their Pricing

Frank J. Fabozzi, Robert J. Shiller and Radu S. Tunaru
The Journal of Derivatives Spring 2019, 26 (3) 7-21; DOI: https://doi.org/10.3905/jod.2019.26.3.007
Frank J. Fabozzi
is a professor of finance at EDHEC Business School in Nice, France
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Robert J. Shiller
is Sterling Professor of Economics at Yale University in New Haven, CT
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Radu S. Tunaru
is a professor of finance at Kent Business School, University of Kent in Canterbury, UK
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Abstract

Real estate derivatives have the potential to stabilize one of the most influential risks present in economies worldwide—real estate risk. Commercial and residential real estate represent a very large proportion of wealth in developed economies. In this article, the authors revisit the evolution of these instruments and describe the state of the art in modeling how they should be priced. The property derivatives market is still underdeveloped by comparison with its corresponding cash market, one main reason commonly cited being the lack of flexible and robust theoretical approaches that can be easily applied in practice. In recent years, several models have been proposed for pricing real estate derivatives, and this article reviews the most important ones. In addition, the authors highlight a discrete-time model that can be easily set up and applied for pricing real estate derivatives employing Monte Carlo simulation. It is reasonable to expect that the expanding literature on real estate derivatives valuation will provide the framework needed for this market to grow.

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The Journal of Derivatives: 26 (3)
The Journal of Derivatives
Vol. 26, Issue 3
Spring 2019
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Evolution of Real Estate Derivatives and Their Pricing
Frank J. Fabozzi, Robert J. Shiller, Radu S. Tunaru
The Journal of Derivatives Feb 2019, 26 (3) 7-21; DOI: 10.3905/jod.2019.26.3.007

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Evolution of Real Estate Derivatives and Their Pricing
Frank J. Fabozzi, Robert J. Shiller, Radu S. Tunaru
The Journal of Derivatives Feb 2019, 26 (3) 7-21; DOI: 10.3905/jod.2019.26.3.007
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  • Article
    • Abstract
    • WHY DO WE NEED REAL ESTATE DERIVATIVES?
    • EVOLUTION OF REAL ESTATE DERIVATIVES AS FINANCIAL INSTRUMENTS
    • REAL-ESTATE DERIVATIVES MODELING
    • ARMA-EGARCH MODEL
    • CONCLUSIONS
    • ENDNOTES
    • REFERENCES
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