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NaomiMaguire
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Property Derivative Option Pricing

February 6th, 2008, 9:58 am

I am trying to model property derivative options but am unsure what the best method for this would be as the market is illiquid, non hedgable and with only swaps traded in the market!!!Also believe that to assume a normal distribution might be a step too far (there is little past data). I am thinking general scenario (Monte Carlo) testing would be the way forward - but how meaningful would this be?
 
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Maelo
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Property Derivative Option Pricing

February 6th, 2008, 10:49 am

Hey:I am interested in this topic...so far I have had these ideas:1) We could safely assume continuous market prices for properties..however the market is "sampled" in a discountinuos way...I am EE by training..then, It seems to be that asssuming the prices of properties are continous BUT what actually happen is that we sample its information at a the rate that is way below the speed needed to make a fairly reconstruction of the original (and true) signal. Thus, the error is way big.2) Do not assume normality..As a matter fo fact I do not think we can assume any underlying distribution for the asset...yet.3) Hedge can be used against REIT's, which are more liquid assets (to mention a possibilty).You see, these are only idaes...I still working in making them a coherent frame.... M
 
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NaomiMaguire
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Property Derivative Option Pricing

February 6th, 2008, 11:03 am

Thanks, I am thinking of looking at REITS for the hedge, have been suggested to use BGM type model and currently argueing against it for (I think) obvious reasons.. Have you thought of an economistic view (ie inflation / rates and credit type inputs) using principle components analysis?
 
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ppauper
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Property Derivative Option Pricing

February 6th, 2008, 1:49 pm

QuoteOriginally posted by: Maelo3) Hedge can be used against REIT's, which are more liquid assets (to mention a possibilty).REITs have the advantage of being more liquid, but in the old days it used to be said that they tended to be correlated with small cap stocks (at least the REITs on the nasdaq did) than with property in general
 
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Cuchulainn
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Property Derivative Option Pricing

February 6th, 2008, 4:27 pm

QuoteAlso believe that to assume a normal distribution might be a step too far (there is little past data). I am thinking general scenario (Monte Carlo) testing would be the way forward - but how meaningful would this be?Ever heard of Black Swans?
 
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daveangel
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Property Derivative Option Pricing

February 6th, 2008, 7:33 pm

as an owner of REIT stock you get pretty much all of the income from the REIT - some of these have long leases. In general, a REIT has considerable leverage and as such the equity holder's claim on the asset is quite tenuous except in a big property bull market which creates considerable equity. But I dont think they would a suitable hedge for your problem.I dont see why you dont think there is sufficient price history for property. In the UK we have Nationwide and another (I cant remember what it is) that have monthly index data going back a long way. You can definitely work out a volatility and I believe a normal distribution assumption for the returns would be reasonable. Perhaps you might want to include some jumps for the crashes too.
knowledge comes, wisdom lingers
 
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Paul
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Property Derivative Option Pricing

February 6th, 2008, 10:21 pm

Some Nationwide data is here. A quick glance at one of their many time series (chosen at random) did suggest normal returns might actually be quite good. I doubt whether you'd need jumps, the market doesn't move fast enough for that. P
 
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PaperCut
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Property Derivative Option Pricing

February 7th, 2008, 1:29 am

QuoteOriginally posted by: Paul...I doubt whether you'd need jumps, the market doesn't move fast enough for that... As far as London real estate goes, I would definitely be long the wings and short the middle.
 
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daveangel
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Property Derivative Option Pricing

February 7th, 2008, 5:30 am

QuoteAs far as London real estate goes, I would definitely be long the wings and short the middle.I just want to be long the downside puts and short the upside calls.
knowledge comes, wisdom lingers
 
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Paul
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Property Derivative Option Pricing

February 7th, 2008, 8:33 am

London peak to trough last time was Q2 1989 to Q4 1992, with largest quarterly fall being 6%.P
 
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NaomiMaguire
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Property Derivative Option Pricing

February 7th, 2008, 8:59 am

I am actually looking more at commercial property rather than residential, trading off the IPD (for eg) index. Have started looking at REITS and am seeing no correlation to the commercial property index - suggesting this would not be such a good hedge. Thanks for the housing data though - this is also something I am interested in...
 
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Paul
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Property Derivative Option Pricing

February 7th, 2008, 9:09 am

Could you upload the REITS and commercial property index data here? (Assuming there's nothing proprietary.)P
 
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cemil
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Property Derivative Option Pricing

February 7th, 2008, 9:12 am

you can use IPD index to evaluate the property swap and option
 
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NaomiMaguire
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Property Derivative Option Pricing

February 7th, 2008, 11:05 am

I am having a few issues loading an excel spreadsheet - there is no code or symbols in it...
 
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ppauper
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Property Derivative Option Pricing

February 7th, 2008, 1:51 pm

QuoteOriginally posted by: NaomiMaguireHave started looking at REITS and am seeing no correlation to the commercial property index - suggesting this would not be such a good hedge..see my comments earlier....
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