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/5412
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