Hedging and pricing rent risk with search frictions

Author

Briana CHANG
Hyunsoo CHOI, Singapore Management UniversityFollow
Harrison HONG
Jeffrey KUBIK

Publication Type

Working Paper

Version

publishedVersion

Publication Date

7-2017

Abstract

The desire of risk-averse households to hedge rent risk is thought to increase home ownership and prices. While evidence for the ownership implication is compelling, support for the price effect is mixed. We show that an important reason is search frictions. Rent risk reduces outside options, leading to less-picky buyers and worse home/buyer matches. This attenuates the rise in the price-to-rent ratio that would otherwise occur without frictions. Consistent with our model, a house remains on the market for fewer days when rent risk is higher. Accounting for frictions significantly increases the effect of rent risk on home prices.

Keywords

Rent Risk, Hedging, House Prices, Search Frictions, Seasonality

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

First Page

1

Last Page

44

Citation

CHANG, Briana; CHOI, Hyunsoo; HONG, Harrison; and KUBIK, Jeffrey. Hedging and pricing rent risk with search frictions. (2017). 1-44.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/5384

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Additional URL

https://ssrn.com/abstract=3000583