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Conference Paper: Empirical estimation of the option premium for residential redevelopment

TitleEmpirical estimation of the option premium for residential redevelopment
Authors
Issue Date2010
PublisherFinancial Management Association International. The Journal's web site is located at http://www.fma.org/NY/NYProgram2.htm
Citation
The 14th Annual Meeting of the Financial Management Association International, New York, NY., 20-23 October 2010. In14th FMA Program, 2010, p. 1-52 How to Cite?
AbstractThis paper presents a novel empirical approach for identifying towns with high value of option to redevelop and measuring the value of this option using a standard hedonic dataset. Our analysis generalizes the standard hedonic model to account for the option value of reconfiguring hedonic characteristics. We test this model with over 162,000 real estate transactions in 53 towns in Connecticut between 1994 and 2007 by adding a non-linear intensity variable, which increases with the aggregate value of structure and decreases with land value. About 20% of towns have positive option to redevelop, with a mean value of 29-34% for properties most like vacant land. Multiple tests across towns support predictions of real options theory. Positive option value towns have higher house price volatility and estimated option value varies positively with price volatility, a finding inconsistent with NPV theory. We also find positive association between option value and drift in house prices and a U-shape relation with house price adjusted for structural characteristics. Higher property taxes reduce the value of option to redevelop.
DescriptionSession 009 - Real Options
Persistent Identifierhttp://hdl.handle.net/10722/136504

 

DC FieldValueLanguage
dc.contributor.authorClapp, JMen_US
dc.contributor.authorSalavei, Ken_US
dc.contributor.authorWong, SKen_US
dc.date.accessioned2011-07-27T02:17:05Z-
dc.date.available2011-07-27T02:17:05Z-
dc.date.issued2010en_US
dc.identifier.citationThe 14th Annual Meeting of the Financial Management Association International, New York, NY., 20-23 October 2010. In14th FMA Program, 2010, p. 1-52en_US
dc.identifier.urihttp://hdl.handle.net/10722/136504-
dc.descriptionSession 009 - Real Options-
dc.description.abstractThis paper presents a novel empirical approach for identifying towns with high value of option to redevelop and measuring the value of this option using a standard hedonic dataset. Our analysis generalizes the standard hedonic model to account for the option value of reconfiguring hedonic characteristics. We test this model with over 162,000 real estate transactions in 53 towns in Connecticut between 1994 and 2007 by adding a non-linear intensity variable, which increases with the aggregate value of structure and decreases with land value. About 20% of towns have positive option to redevelop, with a mean value of 29-34% for properties most like vacant land. Multiple tests across towns support predictions of real options theory. Positive option value towns have higher house price volatility and estimated option value varies positively with price volatility, a finding inconsistent with NPV theory. We also find positive association between option value and drift in house prices and a U-shape relation with house price adjusted for structural characteristics. Higher property taxes reduce the value of option to redevelop.-
dc.languageengen_US
dc.publisherFinancial Management Association International. The Journal's web site is located at http://www.fma.org/NY/NYProgram2.htm-
dc.relation.ispartof14th FMA Program 2010en_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.titleEmpirical estimation of the option premium for residential redevelopmenten_US
dc.typeConference_Paperen_US
dc.identifier.emailClapp, JM: john.clapp@business.uconn.eduen_US
dc.identifier.emailSalavei, K: ksalavei@mail.fairfield.edu-
dc.identifier.emailWong, SK: skwongb@hku.hk-
dc.identifier.authorityWong, SK=rp01028en_US
dc.description.naturepostprint-
dc.identifier.hkuros188870en_US
dc.identifier.spage1-
dc.identifier.epage52-
dc.publisher.placeUnited States-

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