Real-Estate Derivatives ─ From Econometrics to Financial Engineering

This book brings together the latest concepts and models in real-estate derivatives, the new frontier in financial markets. The importance of real-estate derivatives in managing property price risk that has destabilized economies frequently over the last hundred years has been brought into the limelight by Robert Shiller. In spite of his masterful campaign for the introduction of real-estate derivatives, these financial instruments are still in a state of infancy. This book aims to provide a state-of-the-art overview of real-estate derivatives, covering the description of these financial products, their applications, and the most important models proposed in the literature. In order to facilitate a better understanding of the situations when these products can be successfully used, ancillary topics such as real-estate indices, mortgages, securitization, and equity release mortgages are also discussed.

The book examines econometric aspects of real-estate index prices time series and financial engineering non-arbitrage principles governing the pricing of derivatives. The emphasis is on understanding the financial instruments through their mechanics and comparative description. The examples are based on real-world data from exchanges or from major investment banks or financial houses in London. The numerical analysis is easily replicable with Excel and Matlab.

Radu S. Tunaru is Director of CEQUFIN, Kent Business School, University of Kent. He has been working in Finance since 2000 and he specialises in structured finance (credit risk), derivatives pricing and risk management, real estate finance, and model risk. He has published over 50 articles and he has received six best paper awards. His latest work includes three papers on real-estate derivatives with Nobel laureate in Economics, Robert Shiller. His career includes working for Bank of Montreal and for Merrill Lynch where he was a vice-president in Structured Finance EMEA RMBS. He serves as an associate editor on the board of Frontiers in Finance and Economics, Journal of Portfolio Management and Journal of Banking and Finance.