Arbitrage Models and Mortgage Options Pricing

Arnaud Simon (1)

1 DRM - Dauphine Recherches en Management

In this paper we examine the applicability of arbitrage theory to real estate. Arbitrage theory has been applied to the valuation of mortgages using partial differential equations, however the implicit assumptions made are problematic when applied to real estate. The latter is a very complex financial asset, and for instance, for the case of default options, one could produce very large errors (even up to 100%) by applying - unwisely - conventional arbitrage theory techniques. The consequences of real estate appraisal are in this paper studied in particular. Because one has encountered similar problems in real options theory as in real estate, the tools developed in that field could probably well adapt to real estate; we provide here an example. Finally the possibility of pricing contingent claims written on properties is discussed.

Mots clés: Real estate finance; arbitrage theory; pricing error; real options

Domaines: Economies et finances; Gestion et management; Méthodes et statistiques

Arnaud Simon. Arbitrage Models and Mortgage Options Pricing. European real estate society ERES 2005, Jun 2005, Dublin, Ireland. ⟨halshs-00150903⟩